The Finance Ministry must not make the exchange rate a matter of life and death and try to adjust as India (with 8 percent devaluation) and other countries have done to increase exports. This was stated by Dr Hafiz Pasha, former Advisor to the Prime Minister on Finance while speaking as a guest in 'Paisa Bolta Hai' with Anjum Ibrahim.
Pakistan rupee has depreciated by 3 per cent whereas China's currency fell by 6 per cent and India's currency by 8 per cent and there was also a decline in exports. There has been a 70 per cent increase in current account deficit during the last seven months largely because of import of cotton bales of around four million. Remittances have flattened and growth was only 2 per cent during the last two months and it would be an achievement if remittances remain stable at the current level.
Dr Pasha said that the country's debt is a matter of concern for him because during the seven months the government borrowed over $3 billion from external sources and there was only $3 billion increase in foreign exchange reserves, which means that $1 billion was spent on imports which is not sustainable. He said that SBP profit is going to be less compared to last year because of decline in interest rate. He also expressed skepticism at the claim of rising SBP profits in budget documents.
Dr Pasha argued that credit default swap protecting nation against nation for five years surged by 56 basis points may be because of medium term prospective as Paris debt relief has ended now and there is international thinking that Pakistan should be sensible particularly about expensive international -borrowing through bonds.
Dr Pasha stated that the government's top priority must be to increase the country's exports as it would help repay the maturing foreign borrowing in the next two to three years.
He added that next fiscal year's budget must focus on growth and increase in development spending especially on China Pakistan Economic Corridor to take full benefit of the project in two to three years. Former advisor to Prime Minister on Finance stated that he was optimistic that with only two remaining reviews of Extended Fund Facility (EFF) of International Monetary Fund (IMF) Pakistan should now focus on increasing development spending to achieve growth.
About state of the economy, he said that there is a mixed picture with some negative and some positive aspects. A 30 per cent production decline in cotton production will have a very negative impact on the GDP. Dr Pasha regretted that agriculture by and large has remained neglected and the country needs to move towards better seed variety which could not happen because the Seed Act has yet to be passed by the assembly.
He added that country used to give support price for cotton in the past but support price is now being provided for only two crops, wheat and sugar, and cotton and rice are not being given support price. If in the coming years support price is not set for cotton crops, then production of the commodity may further decline.
Dr Pasha said that the positive aspect in the economy was an historically low inflation rate and this was not only Pakistan specific as low inflation phenomenon was across the globe and some countries fear that they may go into deflation, Inflation in Pakistan is moderate, he said.
According to Pasha fiscal deficit and current account deficit are very significant. As far as fiscal deficit was concerned, the government discussion with IMF reflects that the target of fiscal deficit was met. The target was met mainly because of two factors - one, there was increase in revenue on account of customs duty and sales tax and, two, the government withheld refunds. Defence expenditure has been slashed by 12 per cent on the books which was not understandable given ongoing zarb-e-azb as well as security issues in the country.
Dr Pasha revealed that the government has only released 22 per cent development spending during the fist six months and "it seems that the government has achieved stabilisation by withholding expenditure which would have a negative impact on growth". On the fiscal side, this time deficit was achieved because of Rs 200 billion surplus of the provincial governments.
He said federal development spending stood at Rs 155 billion and Punjab development spending alone is Rs 140 billion which is surprising as the federal spending should have been a lot higher due to China Pakistan Economic Corridor. He said infrastructure and transport projects especially for the Corridor remain very low, about 19 per cent during the first six months, which would compromise implementation of CPEC.