The Federal Finance Minister Shaukat Tarin has stated that USD 60 billion had been spent to maintain the rupee-dollar parity at a certain level during the tenure of the last government (2013 to 2018). It is the duty of our society and financial circles at large to verify the said figure as this country is faced with a special problem with regard to references of certain big amounts by very high people which are not substantiated by facts. This includes an official summary by the then Secretary Finance, Tariq Bajwa, which was furnished to the Cabinet by the then Finance Minister Ishaq Dar about the assets held by Pakistanis abroad of $ 200 billion. This amount was never substantiated and unnecessary chaos was created in the country.
In my opinion, the State Bank of Pakistan’s (SBP’s) record can reveal that exact amount used by the central bank during that period to maintain the dollar-rupee parity. Though the exact manner of using such funds may not be revealed however a general estimate can be shared in the national interest as those who claim to keep the rupee’s value during a particular period are properly answered. There can be reasons for their action; however, the nation must be told the facts to reach its own conclusion. This article has been written only to inform the people at large that economic policies of a particular government may not always be in line with the medium and long-term national interests.
In the field of foreign exchange parity rate there is a history that there is always a devaluation of Pakistan rupee of around twenty five (25) percent with the change of government. It happened in 2008, 2013 and then in 2018.
The amount referred by the Finance Minister may be on the higher side; however, even if we discount it to fifty (50) percent the cost estimate will be equal to USD 30 billion, which is still a substantial sum in Pakistan’s context. The exchange rate during the period 2013 to 2018 was Rs 101.62, 102.77, 104.77, 105.45 & 121.82. This shows that the rupee parity remained stable during the tenure of the last government. It is highly important to identify two points: (i) whether such stability was on account of stable current account balance of the country during that period or (ii) it was due to the strategy that the government adopted with respect to the manner of economic growth for the country.
There cannot be an exact indicator for the determination of value of currency of a particular country in relation to other currencies. Nevertheless, two indicators are extremely relevant for that subject. These are the net current account balance of the country and future prospects for economic growth.
Stability of a currency within the net current account balance is in principle determined on the basis of net trade balance. During the years 2013 to 2018 the net trade account was negative by $ 15.68 billion, 17.44 billion, 19.55 billion, 28.40 billion and 34.90 billion. Even after taking into account the remittances from abroad, foreign direct investment and the foreign currency loans and other inflow there was a net currency account deficit in all the years of $ 1.91 billion, 1.4 billion, 1.03 billion, 2.58 billion, 5.3 billion and 5.9 billion. These indicators are sufficient to reveal that there was no apparent reason for stability of currency during that period. These facts therefore lead to a conclusion that State Bank of Pakistan through modes available to it used dollars to maintain a fixed rupee to dollar parity. In very simple terms, it was a direct subsidy to importers and users of imported goods by the government of Pakistan. There are two recipients of that subsidy. First is the Government of Pakistan itself being the major importer in the form of petroleum and other such products. The other beneficiary are people who trade and use the imported products, including capital goods. In my view the share of the two is 50:50. One striking phenomenon that appeared during that period was: no major investment in plant and machinery except Chinese Imports. This means that the Government of Pakistan was effectively subsidising imported consumer goods. Empirically, this fact can be verified by the fact that during this period there was mushroom growth of stores and chains dealing in imported products and other evidence. We in Lahore and Karachi are the witness to this proliferation. There cannot be any retrieval of what has been done. If $ 30 billion had been used to subsidize imports and keep the dollar at a low rupee value then it must be fully understood that this is a sunk cost which has not resulted in any good for the country in the long run. The exchange parity is a natural course and whenever that adjustment is stopped it bounces back to its real sum and the amount used is wasted. This is a reason behind the argument of the IMF (International Monetary Fund) for non-interference of government in the exchange rate. In our country we run a hybrid system for interference and ultimately the national interest is compromised. People at large do not know who is being subsidized and at what cost. In my view this was a grave error committed by that regime.
There was a political rationale behind this intentional error. The government at that time wanted to show an economic growth of 5% plus. They knew fully well that there is no potential and effort for increasing exports. Therefore, they heavily relied on an import-led growth which justified their actions from two viewpoints. Firstly, they were to provide imported products at cheaper prices to affluent classes of the country. This aspect can be properly understood by the fact that the value of imported or smuggled beauty soaps in the market was at times less than the prices of locally produced products.
Secondly, the increase in imports directly supported the higher collection of taxes as in our country around 55% of tax collection is directly or indirectly related to imports. Society that has been nourished during that period is extremely unhappy with the present regime for the reason that this government was forced to accept the IMF diktat of no interference in exchange rate parity and because of an almost collapse had to place direct or indirect caveats for unnecessary imports. This was a blow to importers and users of imported products who flourished at the cost of people who use locally produced products.
If we make a totally independent analysis of the subject then it is almost clear that whatever has been said by the Finance Minister is correct; however, the people at large are not able to understand that Pakistan has been a victim of abuse of economic policies for particular government for short term gains which result in almost suicidal conditions for the state on overall basis. This leads to a very bitter conclusion that such matters cannot be left to the people sitting on Constitution Avenue unless there is complete transparency of actions undertaken.
Those who were intervening in the foreign exchange markets with the support of the State Bank of Pakistan are not accountable for any action as it falls within the powers they are allowed to exercise.
The question for this nation is whether any future political government which is not under the IMF programme will be able to take such actions when there is perceived or deemed autonomy of the State Bank of Pakistan. My conclusion is that there is a dire need for transparency of actions and a strong financial reporting system in the public domain that places facts before the people and exposes such abuse.
Copyright Business Recorder, 2022
Comments
Comments are closed.