Spearhead Analysis – 13.12.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
After starting its journey at par with the US Dollar in 1947 the Pak Rupee has steadily lost value over the years, depicting the broader economic decline over the past many years and successive governments.
- From 1990 to 2018 (28 years) the Rupee has lost around 7.2% in value every year.
- From 2013 to 2018 (5 years) the Rupee has lost around 10.5% in value every year.
- From December 2017 to December 2018 (1 Year) the Rupee has lost 33% in value in one year.
The decline in recent years is becoming more pronounced as the economy continues to suffer from insufficient inflows and faces rising current and trading account deficits. The strategy of the two past governments has been to pile on additional debt to manage the situation and in the process the country has suffered immense damage as its industrial base has taken a severe beating in the face of rising imports fueled by a consumer driven economy.
PAK RUPEE DEVALUATION
The one year steep decline in the value of the Rupee in particular has been most alarming, and a trend that is likely to continue in the short to medium term. At the same time it is surprising that despite the inflationary pressures building up, in a largely import driven economy, there have been no protests by the people. Everyone seems to be taking the decline of the Pak Rupee in their stride, much like the decline in the broader economy.
One of the arguments for accepting devaluation of the Rupee is the much touted promotion of exports.
Pakistan Exports in USD Billions
Since 1990, the exports have risen from around USD7 Billion to USD 25 Billion in 2017 (after having peaked at around USD30 Billion in 2013). That implies an increase of 4.8% per annum over a 27 year period – much below the level of devaluation of 7.2% per annum for the period. Exports are not just driven by currency valuation. The level of competiveness, the availability of skilled labour, the cost of imported raw material, input costs such as utilities and the availability of infrastructure and ease of doing business are all factors that impact export growth. Unfortunately, Pakistan ranks dismally on most if not all of these factors. As a result, the past devaluations of the Rupee have repeatedly failed to produce the desired results of rapid export growth.
Foreign Direct Investment (FDI) has risen to a level of around USD2.5 Billion in 2018, which remains dismally low in the face of an environment that has not been conducive for doing business. During the Musharraf era the country reached a level of around USD5.5 Billion in FDI but has since experienced a sharp decline. Having been placed on the FATF Grey List has not helped, as it has made conducting business far more difficult. In addition the ongoing devaluation eats into the repatriation of profits and dividends for companies that invest in Pakistan. As a result, unless the business conditions and infrastructure are substantially improved there is little opportunity for growth in FDI in the future.
Pakistan Remittances USD Billion
Over the past 28 odd years the remittances have risen by around 7.5% per annum to a level of around USD19 Billion. This is in line with the rate of devaluation of the Pak Rupee during this period. At the moment the remittances are stagnant at a level of USD19 Billion and efforts are needed to equip and channelize the growing population bulge for increasing remittances. For this education and skills training is a must, which is severely lacking in Pakistan.
Pakistan Forex Reserves USD Billions
Similarly the foreign exchange reserves of Pakistan have continued to be at low levels. With current reserves hovering around the USD14 Billion level (Central and Commercial Bank Reserves), over the past 28 years the reserves have risen by 7.2% per annum, in line with the depreciation of the Pak Rupee. With low levels of exports, low FDI, low remittances, the growth in reserves has largely been fueled through borrowing internally and externally, such that the country now faces public debt at a level that it has never experienced before. This in turn is building repayment pressure, which is placing considerable strain on an already beleaguered economy.
The current government continues to grapple with an economic situation that it has inherited. It has to right the wrongs of the past many decades. It was expected that the government had a plan and would hit the ground running on the economic front. The events of the past three months have proved otherwise. The government has been trying to avoid having to approach the International Monetary Fund (IMF), but in the process has been unable to garner the kind of financial support it was expecting from friendly countries. At the same time it continues to delay finalizing arrangements with the IMF, which is having a detrimental effect on the economy. In the process, the uncertainty and the resultant inflation, devaluation and interest rate hikes are placing economic and financial pressures on the people. The Rupee continues to lose value and there is expectation that it could fall to a level of Rs.150 against the USD. It has been termed as the ‘worst performing currency in Asia’. While there may be an expectation that exports will rise and allow the government to plug the fiscal gaps, such hopes have quickly faded in the past and for the moment there is nothing to suggest otherwise.
There is a need to build effective governance structure, facilitate doing business, simplify the tax regime, improve the skill set and provide the required infrastructure to setup and run u=industry in Pakistan. Capacity building is what is required. For that devaluation or a withering Rupee will not help. Pakistan needs to emerge as competitive and modern state amongst the comity of nations and for that a culture shift has to be instituted beyond mere optics, with real objective policy making and implementation.