I for one have been rather disappointed by the recent banter in the press between a seasoned politician/parliamentarian and the Finance Minister about some sort of mutual challenge on the parity between the Pak Rupee and the US Dollar. Exchange rate pinning in today’s global environment is serious business carrying significant implications on an economy’s health and should not be discussed in a speculative manner, especially by the government. While there is no denying that generally speaking the present surge of the Pak Rupee against the US Dollar is a welcome sign, the phenomenon in itself needs to be analyzed carefully. What we saw last week was a kind of currency mayhem where the rupee gained nearly 8 to 8.50% against the dollar in less than 7 days or in annual weighted terms roughly 400% and this easily qualifies as an ‘economic jolt’ - In a matter of a few days the government almost eroded the entire GSP Plus advantage to its exporters, which had taken years of hard work and lobbying to earn. As we know, a jolt (even a positive one) to an economy is never good, particularly if the outcome is not sustainable.
As details gradually unfold, it is becoming evident that the Rupee’s up-swing owes more to an outright grant and deferred oil import payments facility (that adds to exchequer’s cash flows) provided by a friendly country than to any real turn around in the national economic dynamics. Also, this opens the door to a host of other critical questions like: Will this grant simply remain parked to provide support to our foreign exchange reserves? If so, then for how long and if the pressure on exchange outflow resurfaces then precisely at what level and under what circumstances can these funds be used?
If not, then what productive use will these funds be put to? International dealings are invariably based on reciprocity, so what exactly has Pakistan promised in return for our generous friends? Further, under the new world order and to maintain the confidence of the global financial markets all money transactions need to be transparently explained. This not only helps economies to productively remain engaged in global trade, but also ensures that by displaying good management practices at the top the ensuing ethics and professionalism filters down internally in their respective home markets. It will be good for Pakistan’s image if the government also explains at length this new development and shares the institutional framework through which such a decision was reached to accept such funds and to leverage them in order to shore up the Pak Rupee on a fast track. Such transparent disclosures will help put to rest any misconceptions that the move perhaps was ad hoc and individual-specific.
Ironically, this friendly gesture also means that unless this one time financial injection or the resultant short-term fiscal space quickly gets converted into productive economic growth, the resulting repercussions could instead be quite grave for an already struggling Pak economy. Steroids as a last resort therapy may be necessary but dependence on them can destroy the human body. An economy is no different where perception, market fundamentals and stability tend to be key. And to successfully achieve these elements, the government needs clarity, vision and a sound strategy. After carefully assessing national strengths and weaknesses a specific model of growth for the economy needs to be selected and then pursued prudently but diligently. A model that capitalizes on the strength of our low-cost yet abundant young labor force to produce goods cheaply, adds value to our natural resources, exports our produce and generates employment to give us equitable growth. More and more studies tell us that inequality today is a menace that the government needs to tackle itself, since removing inequality helps growth, it doesn’t hinder it. Moreover, it is not something that will eventually stabilize or go away on its own. The free market alone or democracy by itself, is no remedy for disparity. Pre World War France was a democracy and yet the system did not respond to a high concentration of wealth and inequality. The elite and corrupt politicians just refused to see it. They kept claiming that the free market was going to solve everything. It didn’t.
Finally, going forward, managing the right exchange rate for the Pak Rupee is going to be crucial in meeting the visible economic challenges facing Pakistan. For example, gauging by the keenness of the present government to quickly grant the NDMARB (non discriminatory market access on a reciprocal basis) status to India, retaining Pakistan’s manufacturing competitive vis-à-vis India is going to be a principal challenge. And in overcoming this challenge the role of the Pak Rupee is going to be of paramount importance. Here, I will not go over the merits and demerits of giving the NDMARB status without safeguards. The danger is that so far our team selected to conclude this initiative with India appears to be rather incompetent. Their entire rationale rests on the basic school-level argument that trade per se and especially with a larger neighbor (emerging Indian market of one billion plus people) is good and is in our interest. Instead, what they need to work on are elements beyond this basic principle. Someone needs to remind them that we theoretically got market access to India nearly 18 years ago (India granted MFN to Pakistan back in 1996) so why has the trade equation for us been worsening since? What is at discussion today is not whether or not trade should be liberalized, but how it should be liberalized on a ‘sustainably fair’ basis? Our team needs to start looking in detail at the subsidy structure (especially in agriculture) in place in many sectors of India and how to dismantle or counter it, how the real effects of tariffs get manipulated through targeted and higher denomination digitized tariff codes and the role of non-tariff barriers like procedural and organizational impediments, visas, security, etc.
Coming back to currency, given that at least in the foreseeable future Indian manufacturing is set to enjoy some distinct advantages over its Pakistani counterpart, arising through their superiority in infrastructure, state support, cheaper utilities, a more disciplined and productive labor force and sheer economies of scale, our main competing tool to counter this edge will in all likelihood be a cheaper rupee. One has seen how China has protected its home industry and exports over the years by resisting the temptation to strengthen its Rinminbi and how the Euro-Zone economies like Spain, Greece and Portugal melted due to their compromised option on the currency’s exchange rate by dint of being locked into the Euro. As for us, with perhaps the largest young population percentage in the world, we will need a lot of employment-generation in the days ahead and therefore need to be very careful about the economic policy decisions that we undertake and the growth model that we select today. This will not only require skill but also teamwork. However, given the rather confused and uninspiring signals emanating from Islamabad’s economic corridors, one can for now only hope and pray that our policymakers know what they are doing and where they are heading.

 The writer is an entrepreneur and economic analyst.

Email:kamal.monnoo@gmail.com