Pak Rupee dropped further against US Dollar (InterBank 65.80/85, open market 66.65/75) on Monday. It has lost 4.45% of its value in the Interbank, and even more in the open market, since the beginning of the year 2008. Inflation is at 13 year high.
The nose-dive of Pak Rupee vs. US dollars, Euro, and other currencies, despite SBP attempts to arrest the free-fall, is a manifestation of the intrinsic weakness of the economy, where all the fundamentals present a negative picture.
Historically, developed countries, for instance, Germany after the WWI, went for a massive devaluation of their currency to make German products, most competitive in the world markets. The result was a tremendous boost to German exports, while making imports into Germany prohibitively expensive. The turnaround in balance of payments to Germany's favour, was phenomenal.
This strategy owes its success to one exceptional factor - the elasticity of German industry to expand production (supply) to meet the unprecedented surge in demand. This is only possible where industry can double or triple its output by working 2 or 3 shifts a day (8 hour per shift) or even 4 shifts (6 hour per shift).
In Pakistan, a massive devaluation of the currency officially took place on May 11, 1972 (during Z.A. Bhutto's regime), when the value of Pak Rupee plummeted from Rs 4.76 to Rs 11.00 per dollar. Since then, the slide downwards has continued unabated till now.
The impact on Pakistan economy has, on the whole, been positive for export of manufactured goods, notably textiles, but the rising inflation has nullified the benefits as far as average citizen is concerned, because the added income has remained confined to a particular strata of society, and no trickle down effect on the vast majority of people is visible. On the contrary the inflation has hit them harder and made their life even more miserable.
Gaining from devaluation is not possible for exporters of primary agricultural products, because their supply (or output) is inelastic. Therefore, devaluation of currencies by countries whose exports are mostly primary or agricultural products (like wheat, rice, cotton, jute, tea, coffee, cocoa, etc) doesn't help. Where value addition comes in and raw produce is converted to a processed product, devaluation may spur exports. However, this pre-supposes that the basic raw materials are totally or mostly locally produced, and not imported.
On the other hand, devaluation makes imports more expensive, and inhibits the quantum of imports, thus dampening the demand for imported goods. However if the demand for imported goods was inelastic (for instance food items, or machinery where local production cannot meet the actual requirement), the result would be quite the reverse and worsen the situation.
Countries with strong currencies or those prodded into revaluing their currency upwards, (like Chinese Yuan) are at a disadvantage as it makes their exports more expensive in terms of other currencies, and consequently restrains their export drive, while cheaper imports provide an incentive to import more, thus upsetting the equilibrium.
Another scenario is the case of currencies pegged to one particular currency, say US dollar, and their rise or fall against other currencies simultaneously with the dollar (or any other currency they are pegged to). On the other hand, floating currencies, or those tied to a basket of currencies have a cushion against the shocks of fluctuations in currency values to a larger extent.
In the context of Pakistan, tied as we are to the US dollar (even though nominally floating) the situation is worse. The falling value of the dollar vis-à-vis other currencies, affects adversely, while our own weakness compounds the issue and makes the situation worse, as our exports are not expanding to compensate for the loss of export proceeds( by an increased volume. On the other hand, our imports of essential items like oil and wheat cost more. This double whammy is crippling the economy and adding to people's misery.
Withdrawal of subsidies, though necessary for budgeting purposes, adds to the common man's burden, so much so that deaths due to starvation, civil strife and worsening law and order situation are rampant. Thus it is abundantly clear that an official devaluation of Pak Rupee is no answer to the country's problems and will only deteriorate the already precarious situation.
WHAT SHOULD BE DONE: There is no formula for a quick fix, but certain medium and long-term plans can be put in motion to achieve a modicum of stability and overcome the crisis.
OUR MOST PRESSING PROBLEMS ARE:
1. Food scarcity and high prices
2. Prohibitive price of oil products
3. Energy crunch and power shortages
4. Hyper inflation, and dwindling purchasing power of Pak Rupee
5. Rising graph of poverty, and fall in real incomes
6. Illiteracy, lack of proper health services, and malnutrition
7. Growing unemployment, and consequent social disorders
8. Falling agricultural production due to various factors.
9. Falling industrial output.
10. Financial squeeze of the worst sort from every possible direction. (The subject has been discussed ad nauseum in these columns, and need not be elaborated here).
MEASURES TO BE TAKEN:
A. FOR FOOD SHORTAGES:
i) Start immediate rationing countrywide for all essential items of daily consumption to ensure fair distribution, and avoid hoarding and profiteering
ii) Bring radical changes in agricultural systems and practices to: (a) increase yields (b) improve storage, distribution and marketing (c) provide adequate finances through banking system to farmers and horticulturists (d) bring fallow lands under the plough, (e) plant trees over all waste lands, coastal and arid areas, (like date palms, coconuts, jojoba trees, etc) (f) promote drip irrigation to conserve water, and so on.
iii) Introduce modern and scientific methods to propagate plants and improve yields, like tissue culture, hyponica, etc.
iv) Overhaul the land ownership system for agricultural lands
v) Organise farmers co-operatives to eliminate middlemen, reducing cost to con sumers, while assuring a better return to growers
vi) Enhance enrolment in agricultural colleges and research centres to produce qualified people in agricultural disciplines.
B) FOR ENERGY CRUNCH:
1) Encourage development of alternate sources of energy (wind power, solar energy, bio-fuels, methane from organic wastes, etc) in public and private sectors.
2) Institute pump-storage for hydel power/dams
3) Expedite arrangements for a regional grid of electric power and two-way transmission for peak hours, between Pakistan-Iran-Turkey, to switch power to and fro due to geographical and time differences of peak demands.
4) Cut red tape to execute existing plans for coal-based thermal power plants
5) Start work on IPI and TAPI gas pipeline projects without delay.
6) Eliminate wastes and avoidable line losses in the existing power transmission and distribution systems.
C) SOLVING COMMON MEN'S PROBLEMS:
1) Rationalise wages and salaries structure in consonance with factual cost of living on an automatic escalation mechanism.
2) Bring records and data collection of (a) Bureau of Statistics and (b) Sensitive Price Index up-to-date and realistic, as per actual retail prices in all corners of the country.
3) Provide vocational training and job opportunities to all parts of the country.
4) Introduce a system of Compulsory National Service for youth in different sectors like health, education, law, defence, security, etc-etc, to provide employment, and eradicate poverty, ill-literacy and ill health etc.
5) Revise pay scales of all cadres to bring them in line with the developed countries, to stop brain drain and attract back expatriate, qualified and experienced Pakistanis living abroad, to serve the motherland.
6) Encourage development and industrialisation in neglected areas to provide equal opportunities for all citizens.
D SOLVING FINANCIAL IMPASSE IN PUBLIC AND PRIVATE SECTOR:
i) Eliminates wastes and inefficiencies at all levels.
ii) Raise salaries and increase punishments for bribery and corruption to rid of this curse forever, by eliminating the motives for corruption (low incomes)
iii) Float one mega bond in various currencies, repayable after 10, 20 or 30 years (bullet payment at maturity) as Zero coupon notes, with sovereign guarantee. These notes, auctioned at discounted values, could be freely negotiable, and used as security by holders to obtain bank loans, or rediscounted.
iv) A sinking fund be set up for retirement of above notes on maturity
v) The proceeds of the loan should be utilised for development and self-sustaining projects, quickly executed to start yielding speedy returns.
vi) Islamic Banks and DFIs should be encouraged to provide funds for equity participation in projects and ventures, rather than short term loans.
vii) Tax collection should be overhauled to make every person pay according to his ability, and not let tax evaders or loop-hole seekers get scot-free.
viii) Rationalisation if currency values 'a la de Gaulle'can solve inflation and other problems, and unearth hidden wealth and tax evasion.
[To be continued]