Spearhead Analysis – 17.03.2014

“Exchange rates must reflect competitiveness and productivity of the economy. In short, a rise in currency value must be earned and not designed”

Dr Hafiz Pasha-Former Finance Minister

Inflation in PakistanSome weeks back the Finance Minister advised people not to hoard dollars because he would bring the dollar-rupee rate to Rs 98 from the then prevailing rate of almost Rs 107. He was not taken seriously because he did not explain how he was going to do it. Well, he has done it. The dollar did fall to 98 before climbing back to 102 but the Finance Minister says it will stay at 98 while most people believe it will hover at just about 100. No one really understands how this was done and almost everyone questions its sustainability — everyone except the Finance Minister.

While announcing a reduction of almost Rs 800 billion in the foreign debt the Finance Minister made some more glad tidings. He said that $ 400 million was expected under Coalition Support Fund payments in April and a whopping $ 1.6 billion over the next four quarters. He announced the formation of a Pakistan Development Fund (PDF) for development projects and predicted that it would grow to $20 billion over the next four years. A mysterious $1.5 billion grant has already come into the PDF probably from Saudi Arabia leading to speculation about what Pakistan has to do in return. Is this the return of the Friends of Pakistan format? The IMF has said good things too — like a growth rate of over 3.3% from the present 2.8 figure. The Finance Minister is looking at 4.5% this year and eventually 6% GDP growth and a 13% tax to GDP ratio with the fiscal deficit moving from 8.6 to 6 this year to 5 next year and 4 the year after that. Remittances are up at $10.24 billion from 9.23 — an 11% increase. It is true that the KSE index hit 27000. Forex reserves are $9.52 billion (commercial and central bank) and predicted to be 10 billion soon and 20 billion in 3 years. Exports are stated to have grown by 6.6% and agricultural credits have gone from Rs 336 billion to 380 billion and large scale manufacturing has grown by 13.2 %. Inflation linked to CPI has been reduced to 8.6% and likely to be maintained at 8.5%. Tax collection is also up. Inflows are expected from the Eurobond launch and the sale of 3/4G. The GSP+ concession is also helping. If all this is put together then the conclusion is that the rise in currency value has been earned and not designed.

Some question marks remain. Have we really saved Rs 800 billion on the foreign debt or does this figure need to be rationalized? If inflation is going to go down to between 7 and 8% then will this lead to reduction in power tariffs and prices of petrol and diesel? Will the fall in rupee value of imports lead to a reduction in revenue collection? And what impact will this reduction have? Will there be any negative impact of a strengthened rupee? Experts are analyzing these and other ramifications but most important are the internal security indicators in the country because that is of paramount importance for any sustainable growth in the economy. So far the news is good and hopes are high but the inherent fragility in the entire arrangement cannot be ignored.

(Spearhead Analyses are collaborative efforts and not attributable to a single individual)