Curiously, he has also advised experts, including former Governors, to stay away from proffering any views on the subject as they lack full information and they would speculate on the basis of their outdated knowledge and confuse the economic players. Clearly, he believes that his front-page article is an exception from this rule.
At the outset, we feel that Dr Ishrat has missed the fundamental point in the debate on the state of economy. The issue is the sustainability of the external account, which means availability of sufficient external resources to bridge the current account deficit. We have been arguing that for a country like Pakistan, it is good, or rather imperative, to have a current account deficit, particularly when generated by rising imports of capital goods and of other productive imports (petroleum products, LNG, industrial raw materials etc.), to support expansion of productive capacity and exports. The current account deficit is the net foreign savings and adds to the national savings, which in turn facilitate a higher rate of investment.
During 2013-16, the economy accumulated a strong base of reserves on the back of a homegrown reforms program supported by the IMF. In the last fiscal year, both the reserves build-up was pushed back,and the reforms process was abandoned. Consequently, we saw a decline in reserves, a significant surge in fiscal deficit, and a three-fold increase in the current account deficit (to $12 billion or 4% of GDP). Consequently, there was a drawdown of reserves of $2 billion during the fiscal year. More accurately, it was $5 billionover the Oct-Jun period.
In the first two months of the new fiscal year, these trends appear to be continuing, as the current deficit during 2016-17 could be as high as $15 billion. In its latest monetary policy statement, SBP has said 'an improvement in the country's external account and its foreign exchange reserve relies upon timely realization of official financial inflows'. This is an amusing statement as one has heard of timely repayment of loans but not of 'timely realization of official inflows'. There is no known BOP-support loan that is in the pipeline either from IMF or other IFIs.
How should this imbalance be corrected? The notion of devaluation as a policy instrument was associated with the fixed exchange rate regimes, long abandoned by almost all countries. Accordingly, casting the debate in terms of devaluation is out of place. Dr Ishrat was someone who saw this transition in the case of Pakistan and his role has been recognized for able administration of the new flexible exchange rate regime. And as the name suggests, adjustment can move in either direction depending on the conditions in the market.
Unfortunately, despite its high-sounding name, we like the regime when it works in our favor. The period 1999-2007 saw a stable exchange rate at around an average of Rs 60/$, thanks mainly to generous debt relief and large inflows of foreign resources in the aftermath of 9/11. However, in the closing years, as soon as the international financial crisis developed, we refused to make appropriate adjustments both on the fiscal and on the external side. Particularly on the external side,the stable exchange rate became a source of some personal pride and wasn't treated like any other market price. So the burden of adjustment was passed on to the successors. Before the country was pushed into an IMF program toward the end of 2008, the new Government had made a whopping 33% adjustment in the rate, laying the entire blame on the previous government for artificially holding the rate.
In the just concluded IMF program, the exchange rate was not a policy variable and no commitment was made about its movements. The policy variable and the leading performance criterion was the build-up of reserves. So long as we kept building the reserves - and the country was lucky that there were plenty of opportunities in the wake of a softening of oil prices - no amount of IMF's arguments regarding non-alignment or over-valuation of real effective exchange rate carried any force, as we had been meeting the reserve accumulation targets.
We have now lost that argument, as we have begun to lose reserves. This process of losing reserves has made the economy vulnerable, which otherwise is healthy and rapidly growing. If there were 'timely official inflows' in the pipeline to be realized that would reverse this trend, there would be no worries. In its absence, we seem to be heading in the direction of seeking another lifeline from the IMF. It is time to realize that the market for foreign exchange is like any other market in which setting an artificially low price by government fiat reduces supplies, leads to a misallocation of resources, reduces growth, and if financed by drawing down foreign exchange reserves, is ultimately not sustainable.
Copyright Business Recorder, 2017