Higher inflation: According to the writer, inflation is at a higher level in Pakistan on account of higher taxes on inputs mainly on electricity and fuel, which has also marred export competiveness of the country. The government has targeted inflation rate of 6 percent for FY18 which is higher than the optimal inflation rate of 2-3 percent for any country and higher inflation implies weakened currency. The writer's argument is not based on factual information.
The data analyses suggest that inflation has been contained in the country while GDP growth is continuously upward moved in last 4 years. The average CPI inflation stood at 4.2 percent in FY2017 against the target of 6 percent, specifically energy inflation and administered prices have remained benign in FY2017 mainly on account of only partial pass through of recovery in global oil prices to domestic consumers. During FY2016 inflation stood at a 48 years low at 2.9 percent. This trend continued in FY2018 as during Q1-FY18 average CPI inflation stood at 3.4 percent, compared to 3.9 percent in the same period last year, while the annual target for FY18 is again set at 6 percent. These numbers reflect that contrary to the writer's assertion inflation is following a benign path.
Furthermore, the writers' view about the optimal rate of inflation also demands some scrutiny. The 2-3 percent inflation range as identified by the author is more relevant for advanced economies. An analysis of Pakistan GDP growth during FY1971-FY2017 shows that the country witnessed more than 5 percent GDP growth for 21 years out of a total 46 years. In all these years of high GDP growth, inflation seems rarely between 2-3 percent.
Higher interest rate: The writer is of the view that "despite a higher domestic interest rate in Pakistan compared to other countries, Pakistan was not able to attract foreign capital flows because of political uncertainty and a lower rating on ease of doing business index". While political uncertainty did affect the portfolio inflows into the country.
Here there is need to understand the relationship between interest rate and capital flows. Out of the various types of debt and non-debt creating inflow like FDI, portfolio, remittances, etc to any country, foreign investment in local debt securities is the only category that is positively related to interest rates movements. However, Pakistan receives only sparse external inflows into its domestic debt securities. This sluggishness can be traced to relatively low level of bond market development in Pakistan among other factors.
Debt & Liabilities: The writer has quoted that "Pakistan's debt & liabilities have increased to 78.7 percent of GDP from 77.6 percent in FY16". However, she seems to miss the point that total debt of government stood at 61.6 percent of GDP at end June 2017. The news report used total debt and liabilities instead of total debt of the government to sensationalize the matter. Total debt and liabilities include the debt of other sectors (private sector, bank borrowing) which are not part of government debt since the government is not liable to pay these obligations, whereas Pakistan's public external debt fell from 20.8 percent of GDP in FY2016 to 20.6 percent of GDP in FY2017.
Real effective exchange rate: Regarding the movement in Pak rupee exchange rate, it is to be noted that unlike nominal bilateral exchange rate between Pak Rupee and US Dollar, the real effective exchange rate is an index made from the basket of currencies of Pakistan's major trade partners/competitors. Thus, the author's analysis that in real terms Pak Rupee stood at 122 per US dollar in August 2017 is incorrect and reflects the author's rudimentary understanding about the foreign exchange market indicators.
Copyright Business Recorder, 2017