Spearhead Opinion – 07.07.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
‘Life is too short for long pity parties. Get busy living, or get busy dying.” [Regina Brett]
As if one crisis is not enough, Pakistan seems to thrive on multiple crises. It could be political, economic, media, or social. The country and its people appear to relish in discussing and over-discussing scenarios and finding devious interpretations in the simplest of issues. Whenever, someone is cornered over an issue, the Pity card comes into play, portraying the person as a victim of circumstances. Perhaps, Mr. Mubashar Luqman summed it up correctly in his recent programme, that the people just want entertainment built around the issues facing and do not want to participate in the actual resolution of the problems. The fact is that the people of Pakistan want to be herded around complaining about their dire situation, but do not want to be part of the possible solution. Everyone can highlight problems, but there are very few who are willing to stick their necks out to resolve the problems or even protest. So it is with the economic situation of Pakistan as analysts and sector specialists continue to illustrate the deteriorating situation, yet the powers to be continue with the same policies, compounding the problems. Maximillian Robespierre stated, “Pity is Treason,” and yet we seem to thrive on it.
Back to reality and economics and foreign exchange reserves. The foreign exchange reserves with the State Bank of Pakistan (SBP) as at June 30, 2017 declined 1.42% to a level of US$16,143.3 Million, down US$232.7 Million over reserves of US$16,376 Million in the prior week. Total liquid foreign reserves held by the country, which includes the net reserves held by the banks other than the SBP, were US$21,367.8 Million, with net reserves held by banks, other than SBP, amounting to US$5,224.5 The decline in reserves is mainly attributed to the payments on account of external debt servicing.
The political uncertainty in Pakistan due to the ongoing Panamagate saga is having an impact on the economic stability and growth of the country. The stock market has been particularly hard hit and the KSE-100 Index has borne the brunt of the prolonged investigation. As if that was not enough, the Rupee suddenly shed 3.2% on July 5, 2017, its biggest one-day fall against the US Dollar since 2008. This was the fateful day when Maryam Nawaz was appearing before the Joint Investigation Team (JIT). Not that there is any connection between the two events, though rumour mongers continue to present conspiracy theories.
The Finance Minister was quick to point out that certain people were taking advantage of the ongoing political uncertainty to exploit the situation and profit from the foreign exchange market. The SBP on the other hand rejected the Government claim and attributed the decline to the inherent weaknesses and rising fiscal deficits in the economy and stated that, “The current exchange rate is broadly aligned with the economic fundamentals”. The pundits in the market believed that the government actually wanted to devalue the rupee.
The fact is that the SBP has been a strong supporter of the government policy of supporting the Rupee against the US Dollar by intervening in the open market. As a result, the divergent statements by the Ministry of Finance and SBP are at best, surprising.
Some analysts believe that the government has been under increasing pressure to devalue the rupee, which by some estimates is over-valued by as much as 20 per cent, because of sharp rise in imports and continuing decline in exports. It is believed that the devaluation is in response to the ongoing economic challenges that have seen Forex reserves decline by almost US$4 Billion from the peak of US$24.5 Billion in October 2016. Historically, the Rupee has shed around 5 per cent per annum and in line with that trend the current devaluation appears to have been long overdue.
It has been stated that one of the larger Banks had made huge US Dollar purchases, creating panic in the market and SBP had been ‘advised’ to stay on the side-lines and not intervene as the Rupee tumbled. It is also rumoured that the Rupee was allowed to slide to facilitate a transaction at the higher rate. Whatever the reasons, the fact is that the Rupee has come down from the highs of Wednesday and SBP and the Ministry of Finance have endorsed the view that the Rupee should be allowed to trade in the Rs.105-107 range against the US Dollar. This automatically translates into a devaluation of the Rupee and alongside this devaluation the Government has appointed Mr. Tariq Bajwa as Governor SBP.
One of the immediate impacts of the ‘managed’ devaluation would be the rise in import costs of most items, including oil and gas, which would translate into upward price pressure. The loan burden of the significant external loans would also rise. It is debatable whether the exporters would be able to benefit as in the past there has been no appreciable rise in exports in the wake of Rupee devaluations. Their structural and competitive issues will remain and input costs would rise. The fact is that the devaluation appears to have been more of a knee-jerk reaction, rather than a well thought out policy, where instead of taking the onus for devaluation the government was seeking scapegoats to blame for the ‘sudden’ fall in Rupee value.
In the wake of the ‘devaluation’ and the growing fiscal pressures on the economy the Asian Development Bank (ADB) has hinted at providing US$6 Billion in new loans over the next three years to expand its policy-based lending. This would translate into US$2 Billion per annum over the next three years depending on project readiness. In the past cost overruns and project delays have impacted such loan disbursements. During the outgoing FY2016-17 ADB provided an estimated US$1.8 Billion in loans and ADB stressed that the country needs to implement deep-rooted structural reforms and that political and economic stability is a must. It is a fact that despite receiving US$1.1 Billion for energy reforms over the past two years, the sector has not become financially viable. Yet there appears to be no real concern on that account as additional debts continue to be contracted.
The fact is that devaluation in itself or the receipt of loans are not the solutions to the economic problems facing Pakistan. After creating a mini-crisis and then implementing devaluation, the process could instead have been handled in a professional and financially prudent manner, without creating a panic in the markets. Highlighting additional borrowing is not as important as is the deployment of funds and the successful completion of the projects for which the loans have been contracted. Pakistan needs structural reforms, professional management, and institutional governance structures. The issues need to be resolved and the country needs to move forward. Ad-hoc policies and cronyism has to be replaced by policy implementation on a professional basis. There is no threat to democracy, and we do not need parallel systems of governance. What we do need is transparency and sincerity in devising policies and implementing plans. The policies need to be aligned with end objectives. For example, instead of doling out State funds to sports personalities, the government could have built robust sports facilities; and, the ‘victims’ of the oil tanker blast near Bahawalpur who were actually looters who were ‘stealing’ petrol – should be treated as such. Wealth should not be classified as a crime, and poverty as an affliction. Rather the state should create a ‘fair’ environment, which provides opportunity for growth and betterment. Unless we can replace the culture of pity, state largesse, doling out of ‘Mughal-era’ benefits, and baseless accusations, with a culture of pride, where the people can stand tall on principles and have genuine opportunities for growth, the country will continue to flounder and move from one crisis to another.