According to a Business Recorder exclusive, the federal government has decided to declare exports a national priority with the Federal Commerce Minister Khurram Dastgir highlighting the structural issues facing the country's exporters in a presentation to the Prime Minister. The objective of the exercise: to raise exports to 50 billion dollars per annum by the end of 2018-19. It needs to be highlighted that the target to be achieved is set for one year after the next elections and hence appears to be more in line with the 2025 unrealistic vision of the Planning Minister Ahsan Iqbal requiring two to three terms of the PML (N) government to meet the ambitious targets.
While there is, without doubt, overwhelming support for the objective, yet it is relevant to note that the Minister of Finance Ishaq Dar is on record as claiming credit for what he termed was his refusal to buckle under International Monetary Fund (IMF) pressure to devalue the rupee. In this context, it is appropriate to correct Dar's definitional error. Devaluation is defined as a reduction in the value of a currency operating within a fixed rate regime. The rupee is no longer operating in a fixed rate but in a managed float regime and therefore devaluation is not a possibility. Depreciation on the other hand allows the currency to determine its value in the open market and any policy decision to keep the currency rate artificially high requires market intervention with the State Bank purchasing foreign currency to prop up the value of the local currency. In the fourth and fifth review of IMF's 6.64 billion dollar Extended Fund Facility, it is noted that "the end-September target (of net international reserves) was missed by US $630 million...in spite of SBP's purchases of US $429 million in the foreign exchange spot market."
The IMF has been insisting on allowing the market to determine the rupee-dollar parity, which is being resisted by the government. The question is why. It is extremely disturbing that Dar is taking credit for intervening in a market where he, as the Finance Minister, has no business. Be that as it may, Dar has deemed it appropriate to contain the rupee-dollar parity through market intervention for two reasons. First and foremost, the Prime Minister reportedly instructed him to keep the rupee-dollar parity at around 100 rupees - a directive premised on the flawed perception that a lower rupee-dollar parity would reflect well on the country's economy, as well as lower the import bill of various products - the benefit of which can be passed onto the consumers. The flaw in this logic is that our export products would become more expensive in the international market relative to other countries whose currencies are not overvalued leading to a decline in exports. Any decline in exports would automatically reduce the foreign exchange reserves (though remittances have been taking up some of the slack in recent years) which in turn would compel the government to either seek a waiver from the IMF in the ongoing sixth review or else hasten the privatisation process, for which the climate does not appear conducive. However, the government's data reveals that imports have been rising while exports have been declining. These facts were revealed by the Finance Minister in a six-monthly review. It so happened despite a steep fall in our import bill due to crude oil and POL products. Neither the Fund nor the Finance Minister needs to give a trading band or a fixed target for rupee-dollar parity to SBP. The central bank needs to have the independence to keep the nominal and effective exchange rates close - so that PKR fares freely.
The second reason for Dar's insistence for not allowing the market rate to prevail is to allow him to understate the rising external indebtedness of the country. He is on record as stating that the government is borrowing externally at 5 percent and retiring domestic debt procured at 12 percent. This may well account for the government's decision to issue Eurobonds at 8.5 and 7.5 percent (ten-year and five-year maturity) and sukuk at 6.5 percent at well above the market rate prevailing in the West. However, Dar is silent on the injection of liquidity by SBP via the banking system in the guise of liquidity management to meet federal government's budgetary needs. This heavy investment by banks in government securities is crowding out private sector space.
It needs to be clearly understood that SBP has to take into account a basket of commodities as well as a basket of competing currencies for maintaining Pak rupee parity with the dollar. It also carries out in-depth research of comparative trends in the incidence of inflation to keep Pakistan's exports competitive with other major exporters of similar export items prior to adjusting the Pak rupee parity with dollar. The fixation of the Prime Minister Nawaz Sharif and Finance Minister Ishaq Dar with a strong rupee as a sign of economic strength needs to end. Instead, the Prime Minister needs to hold a monthly meeting of the Federal Export Board while the Finance Minister undertakes to address stuck export refunds. In addition, Nawaz Sharif's cabinet needs to give top priority to exporters in respect of supplies of natural gas and electricity. Without ramping up production and creating an exportable surplus we cannot generate higher exports. General Zia-ul-Haq was the last head of state (or government) to hold monthly meetings of Federal Export Board. Under Musharraf, there was a massive investment in export industry, particularly textiles. As a result, there was doubling of exports in less than a decade. Therefore, a 'helping hand' is necessary. There appears to be no national focus on exports. Country's leadership is preoccupied with terrorism and energy shortages. The Federal Export Board needs to meet urgently and focus on boosting export. When exports increased from eight to 18 billion dollars between 2000 and 2008 - of the eight billion dollars increased, five billion dollars were accounted by textiles and two billion dollars by non-traditional exports. This is the area we urgently need to focus on. None of our aid or loan givers, including the IMF, will help in capacity building as it would reduce Pakistan's dependence on them.
The original ordinance promulgated for the formation of Trade Development Authority of Pakistan (TDAP) had envisaged a 10-member strength of private sector on the board. The law passed reduces that number to five, replacing five private sector nominees with bureaucrats. This needs to be rectified without any further loss of time.
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