The 'Nawaz Sharif dividend'

At a news conference Federal Finance Minister Ishaq Dar proudly announced that the "difficult period" for the economy was over and that the price of all items - from onions to the dollar - has declined which would have a major positive impact on the domestic rate of inflation. The indicator used to express his optimism was the declining rupee value vis-a-vis the dollar from 105.50 per dollar on 1st, 2nd, 3rd and 4th March 2014 to 104.50 rupee for each dollar on 5th March. The following day the dollar was on offer in the open market at 104.4 rupees, on 9th March at 103 and on 13th March at 98.5 rupees per dollar. So what decisions did the government take that may account for the significant appreciation of the Pakistani rupee. The sales tax on foreign exchange transactions imposed by the Sindh and the Punjab governments was agreed to be withdrawn during the last meeting of the Council of Common Interest on Dar's request who had correctly argued that the rupee would not strengthen in the external marketplace until this tax is removed. But it is unclear whether a notification to this effect has been issued by the two provincial governments given that Sindh had opposed the move on the grounds that a tax on services is a provincial subject though in anticipation of such a notification the rupee value may have appreciated; but certainly it would not have appreciated by as much as has been evident in recent days. The government banned the import of gold as a means to check smuggling of the commodity to India that was having a negative impact on the domestic currency, however, this decision was taken in January 2014 and it is doubtful if its impact fuelled a rapid rupee appreciation that began less than a week ago.
There is no doubt that the strengthening of the rupee at first baffled economists because the fundamentals of the economy have not changed sufficiently for the dramatic and unprecedented appreciation of the rupee; these include: (i) a rise in remittance income average inflow between July-February 2014 to 1,280.6 billion dollars in contrast to 1,154.3 billion dollars in the comparable period in 2013, however, remittances have been steadily rising for the past two years or so; (ii) trade deficit declined by 4.89 percent in July-February 2014 reflecting a 6.2 percent increase in exports and a 1.17 percent increase in imports - a rise that is not sufficient to explain a rupee appreciation though it has been reported that exporters sold their currency as the rupee began to strengthen and did not, like earlier in the year, delay bringing their earnings into the country to maximise their rupee value; (iii) growth rate on the International Monetary Fund (IMF) website is 2.5 percent for 2014 though in a press release dated 9th February the Fund indicated that the rate may have improved to 3.1 percent premised on the quarterly data shared with the Fund and not 3.3 percent cited by Dar during the press briefing. Be that as it may, Jeffrey Franks had, in an exclusive chat with Business Recorder, stated that the Fund would evaluate the quality of the quarterly data presented by the Pakistan Bureau of Statistics and currently two members of the Bureau are in the US; and (iv) the government domestic debt and liabilities rose from 6,226.4 billion rupees in June 2013 to a whopping 10,749.7 billion rupees in January reflecting an expenditure revenue trend that compelled the government to borrow heavily from the State Bank of Pakistan with severe inflationary consequences. And in this context it is relevant to note that even though tax collections have risen by 17 percent compared to a year ago, yet the one percent rise in sales tax, whose incidence is greater on the poor than on the rich, accounts for the bulk of this rise with many also arguing that the rise under other heads is due to advance tax collections. Current expenditure too has not been curtailed. So what went so very right? The Finance Minister referred to a large inflow from a friendly country that he did not wish to be named though many refer to the two-day visit of the Crown Prince of Saudi Arabia as the most likely source of the inflow. It is unclear whether this amount is a grant, a loan or indeed an advance for services to be rendered as the relevant website is silent on this inflow. However, this inflow in itself would account for as a prime mover for the rise in the rupee value and is being viewed as vindication of view within a section of the business community in particular that assumption of reins of government by Nawaz Sharif would auger well for the economy. A look at M2 (indicator used to measure money supply in the economy and includes currency in circulation, other deposits with State Bank of Pakistan, demand and time deposits including foreign currency deposits with scheduled banks) indicates a dramatic decline in government borrowing from the State Bank of Pakistan - from 2,212.9 trillion rupees by end of June 2013 to only 185.7 trillion rupees by 28th February 2014. The question then becomes whether the rupee appreciation is sustainable. Yes it can be sustainable if the government begins to revisit its expenditure and revenue generating policies. Current expenditure needs to be curtailed massively and development expenditure should be allowed to become the engine of growth while tax system needs to be rendered equitable, fair and non-anomalous. Reforms are still awaited and so far there have only been cosmetic changes at best.