The rupee ceased to be pegged to an international currency in 1982 and a managed float was adopted as policy. By 2000 the government claimed a free float however few economists consider that the Pak rupee is in a free float and instead maintain that it is a 'dirty float' defined as frequent interventions in the exchange rate market as and when deemed appropriate by the State Bank of Pakistan (SBP) under advisement from the Ministry of Finance - an intervention that has been more pronounced during the current administration.
Disturbingly, a strong domestic currency, the bane of exporters all over the world, is mistakenly regarded by Dar as well as Prime Minister Nawaz Sharif as a reflection of a stable and sustainable economy. One is at a loss to understand the logic behind this belief given the plethora of economic theories arguing the reverse - theories that have reportedly been supported by Pakistani exporters in their meetings with both the Prime Minister and the Finance Minister.
The value of a currency is a symptom or outcome of an economic malaise rather than the cause, or so basic economic theory dictates. The following table provides comparative relevant data during the PML-N and the PPP led-coalition administrations based on statistics uploaded on the State Bank of Pakistan (SBP) website.
First off there is no doubt that Ishaq Dar did raise foreign exchange reserves of the country from 13.6 billion dollars in February 2013, the last full month of PPP-led coalition government's tenure, to 20.9 billion dollars in March 2016. However both these figures are over stated as they include private sector foreign exchange held in commercial banks - an item that is not credited to the government reserve position by economists world-wide/multilaterals (the mission leader for the recently completed International Monetary Fund programme reiterated this during a press conference with Ishaq Dar when the latter claimed reserves that included this item). If one takes away private sector foreign exchange held in domestic commercial banks from the total liquid reserves then too the position under Dar appears to be significantly improved relative to the tenure of the PPP-led coalition government. Actual reserves held by the SBP were only 6006.4 million dollars in election year 2012-13, down from 10,803.3 million dollars the year before, while reserves rose to 9097.5 billion dollars in 2013-14, to 13,525.7 million dollars in 2014-15 and 18,268.9 million dollars by end December 2016. Dar did well in raising reserves which provide support to the currency however the question is: what is the source of these reserves?
Dar is frequently accused of shoring up reserves with borrowing. According to SBP data total external public debt on 31 March 2013 was 51.3 billion dollars and in September 2016 the total external debt alone rose to 62.3 billion dollars. This is a whopping 21.4 percent increase in external borrowing in three years and three months. However the components of the increase in debt compound economists' concerns. While in 2013 there was no reliance on commercial bank borrowing, which is procured at high rates of interest with very small amortisation period, Dar relied on this source to the tune of 1.58 billion dollars by September last year prompting analysts to maintain that there would be a net outflow of resources rather than any inflows by the end of the first half of the current year. This situation necessitates a rise in remittances, which are declining due to ongoing recession in the Gulf region due to low price of international oil, and exports, which have been declining with the package announced unlikely to raise exports sufficiently to meet the shortfall. In addition Dar has relied on issuance of high yielding Eurobonds and Sukuk which have raised our indebtedness to 4.55 billion dollars. Domestic debt was 8.8 trillion rupees in March 2013 however by 30 November 2016 Dar had increased reliance on this to 14.64 trillion rupees or a rise of an untenable and unsustainable nearly 66 percent in three years and five months. Given the revenue shortfall from what was budgeted and the 180 billion rupee export package reliance on external commercial banking sector and/or domestic banking sector is likely to rise in the coming months with severe negative implications on the real rupee value.
Dar's defence when ever accused of heavy unsustainable reliance on external and internal borrowing has been two-fold: (i) the debt to GDP ratio is much lower than Greece. True but he has been unable to defend growth data which local economists maintain is overstated by over one percent while Greece as a member of the Euro has access to funding which Pakistan does not have; and (ii) he cites portfolio investment rise as a reflection of the state of the economy (foreign direct investment has been declining). However around 40 odd players in our stock market have and continue to manipulate the market in exchange for lower taxes (the market generates around 5 billion rupees in taxes per year while its potential is around 100 billion rupees - a potential that our neighbour India does reach).
Data shows the widening gap between real effective exchange rate (REER) and the average exchange rate for the month between 2013 and 29016. In March, 2013 REER was 101.517 while the exchange rate for the month was 98 - a difference of 3.4565. In November 2016 the REER rose to 125.9848 with the average rate being 104.693 or a massive difference of 21.29. And this difference will continue to widen unless Dar ceases to procure domestic and very expensive short term external loans, as well as does not engage heavily in borrowing locally, reverses the decline in exports (which require allowing the rupee to reflect market conditions better) and foreign direct investment and last, but not least, begins to raise revenue from the stock market instead of on taxes on consumer items like cell phone cards that are indirect and their incidence on the poor is greater than on the rich. To add insult to injury, the poor pay the non-filer higher rate even though they are exempted from filing their returns and the reason is that they do not have the capacity or indeed the knowledge that they can get refunds which, in any case, are paid out after inordinate delays as they are used to show better revenue generation than is in fact the case.
Copyright Business Recorder, 2017