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Dar’s take on PKR depreciation: some questions?

October 15, 2014


By: ASAD RIZVI   Published on July 05, 2014

Ishaq Dar is always good at choosing places and timings to deliver his best on economy; he is confident that he will never be challenged. This time he chose to give a written reply to the House to inform National Assembly about tax collection and gave his analysis on Rupee/Dollar parity from 2008-13, blaming the balance of payment (BoP) woes for a sharp depreciation of rupee during these years.

We all know that despite a downward revision of tax target on three different occasions, the target was never met. Further, he also gave his observation on his favourite subject, exchange rate, stretching from 2008 until 2013. However, technically it is the Central Bank Governor’s prerogative to talk on the subject of exchange rate, as and when required. Minister of Finance or no other government official is supposed to talk or give his views on the subject, which is a sheer violation of norms. When a couple of ministers of previous government spoke on the dollar-rupee parity, they were warned against making such statements in future.

We hardly see our Foreign Minister being questioned on serious monetary issues, as no one has ever dared challenge him on exchange rate parity probably because of his high level of confidence. I would like to add some facts. In 2008, sensing difficult days ahead, Dar was smart enough to part ways with the Ministership, which was indeed a tough task for the PPP government.

Until 2007 Pakistan’s economy was roaring, as GDP during the General Musharraf era was comfortably averaging around and over 6 percent, surging from $60 billion to $170 billion while tax-to-GDP was hovering above 11 percent. Privatisation was a great success story as it fetched nearly USD 8.4 billion. Electricity production was comfortably above 14,000 megawatts, as it touched a high of 16,000 megawatts. One US Dollar was equivalent to Rs 61. In the same year of October, foreign exchange reserves hit an all-time high of USD 16.486 billion. One negative factor that was raising its head by 2008 election was that the government borrowing surged to around Rs 600 billion due to oil and other subsidies.

There was ample liquidity in the market, and SBP became worried about inflation prospects. Hence, the central bank made a surprise move by hiking Cash Reserve Requirement (CRR) by 3 percent to drain excess liquidity out of the market. By the end of fiscal year 2007-2008, oil prices were hiked four times resulting in an increased pressure on foreign exchange reserves, as exports never gave any comfort to economy. BoP’s position was hurting and deficit was on a constant rise. There was a shift in market sentiment as investors were using kerb market to transfer funds to the Middle East that pushed rupee towards 67 per one USD in the interbank market after 3 years of stability that led to an added pressure on forex reserves resulting in draining of Rs 200 billion from the system.

The pressure on forex reserves was so acute by the end-2008 that the government was forced to approach the IMF to propel its foreign exchange reserves. This was when the central bank was compelled to depreciate rupee heavily, forcing a sharp weakening of rupee by nearly 16 percent by FY 2009.

By then the economic conditions began to worsen, as banks were shying to lend money to corporate sector, as Advance/Deposit ratio soared to 73 percent. Inflation was picking up due to higher adjustment of oil prices and food import. By the end of FY 2008-2009, enough damage had been caused to the economy as rupee was trading around 81 per one US$.

Meanwhile, fiscal slippage was another worrying factor due to a low revenue collection, causing a fall in tax to GDP ratio. Interestingly, by the end of FY 09 oil bill fell by USD 2 billion to 9.5 billion versus $11.5 in FY 08. But the economy could not make gains, which was on the decline, as the country to too dependent on foreign funding that had dried up and hence, could not benefit from oil price fall then averaging around USD 73 per barrel. By the end of calendar year 2009, rupee-dollar parity received a further blow Rs 84 equal to one US$.

The year 2010 never looked easy for the economy, as banks were never keen to fund corporate sector that saw a shift in banks’ lending portfolios, as investment by banks in government securities reached 40 percent, resulting a big fall in GDP growth to round 2.5 percent suggesting a sharp economic slowdown.

During this time, inflation was in double digits due to government borrowing, caused by a shortfall in revenue collection; the economy was in deficit and banks were unable to generate genuine deposits. Commercial banks deposit growth was largely based on accrual interest income resulting in a decline in banks’ Advance to Deposit Ratio. Currency in circulation that was Rs 800 billion in 2007 jumped to Rs 1.577 trillion by December 2010. Circular debt touched Rs 300 billion (Oil Rs 250 billion + Commodities Rs 50 billion) making the GoP to launch a new master instrument of Rs 268 billion to settle the power companies’ loan.

By now (2011) the economy was faced with a bumpy ride, as remittances were the only hope and a large contributor towards economy. The Arab Spring was helping in increasing the flow of remittances. Exports remained disappointing whereas rising oil prices continued to pose a threat to macroeconomic indicators.

Unfortunately, however, SBP never sensed the urgency or played a pro-growth role for the economy and by now the nation was faced with a severe stagflation period. Growth is central bank’s responsibility for it has nothing to do with fiscal policy, which is MoF’s baby. In 2011, scheduled banks’ deposit was Rs 5.415 trillion and advances were Rs 3.357 trillion that had dropped to 62.33 percent, a clear indication that in a 3-year period, banks’ lending to commercial sector was on a constant decline that had dropped by over 10 percent. By the end of calendar year pressure was on exchange rate due to rising oil prices and bleak FDI prospects, disrupting BoP position that had pushed rupee-dollar parity to 89.95.

FY 2012-13 was also faced with huge challenges. Circular debt remains a big issue despite claims of its settlement. The government borrowing is unavoidable as there is no alternate or plan to overcome the economic woes. Remember, annual population growth is around 3.8 million.

Economy is struggling around a 3 percent growth rate. Tax-to-GDP ratio has been hovering around or below 9 percent. Energy shortfall remains a major issue. Growth in public sector constantly remained in the negative territory for three years; it is inching up at a snail’s pace, which is not enough for economic stimulation. By now domestic and external debt position has attained an alarming level.

The present economic condition is no different from the period mentioned by Dar. Then external debt was USD 40 billion versus USD 60 billion. Domestic debt was Rs 5 trillion versus Rs 11 trillion, which will surge by another Rs 5-6 trillion by the end of this government’s five-year term. When there is no new initiative that will improve the revenue collection condition, so how would tax to GDP position will get better? If government increases its spending then how will you manage to bring down deficit to 3 percent in the next three years or is it still a hidden strategy? Where is and what is the plan to increase revenue collection to reduce government borrowings and meet its target.

The government borrowed USD 2 billion through Euro bond; but or what is the payment plan? The government is already required to transfer over USD 2 billion profit annually. It wants to increase energy production to around 14.000 MW. Please let us know the funding source to purchase oil to increase electricity production. Since last three years exports was hovering around $24-26. How much will European relief and Indian relationship add to our stagnant exports? What is your plan to pay back the IMF loan?

(The views expressed in this article are not necessarily those of the newspaper)

                             Copyright Business Recorder, 2014

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