Here I was defending that PML-N had finally assembled a decent economic team in Shahid Khaqan Abbassi, Haroon Akhtar and Miftah Ismail (never mind Rana Afzal who perhaps is only a political face), all qualified gentlemen, but the way they have managed economic policies in their brief tenure as a trio has been nothing but disappointing. In the long five years at the management school where one joined after graduating as a student of economics and econometrics, the Management-101 lesson was that even the best of economic policies can backfire if not accompanied by sound management strategies. And according to Avinash Dixit and Barry Nalebuff work: ‘Thinking Strategically, The Competitive Edge in Business, Politics, and Everyday Life,’ (our Strategic Thinking text work at the Yale SOM), our professor consistently hammered into our minds that setting real time planning as a pre-requisite to actions is what differentiates the economic management specialists from pure theoretical economists! Fast forward this by nearly 3 decades to an age where IT just about allows you advance-outcome-planning for almost every action, we here in Pakistan still seem to be repeating the mistakes of a bygone era: Act first and plan later!
Devaluation should never be taken lightly by any developed or developing economy, as it is like admitting failure. Admitting that within its ambit the available human resource skills are no longer competitively employable and the country of late has been living beyond its means. Also, a devaluation exercise is invariably followed by a surge in inflation and an interest rate hike - Inflation as we know is the worst kind of tax on the common man and interest rate hike in-turn leads to a slow down in investment, since businesses start preferring cash/liquidity to credit. So in essence, unlike here in Pakistan where we hit the devaluation-drive every few years without giving it a second thought, serious minded leaderships instead take their currency adjustments extremely seriously. If China consistently kept its Yuan/Renminbi on the lower side for almost 30 years after entering the WTO, it had a specific plan and some clear targets in mind. The idea was to create an export surplus using low wage levels and that too financed through a clever barter system of shared essentials that incentivised even the lowest paid jobs over disguised employment. The increased industrial output prudently combined with operational discipline and effective population control not only gave rise to an unprecedented size of skilled labour force and a world class export surplus, but also saw poverty eradication on a size the world had never witnessed before. Of late, the two examples that come to mind relate to the 2008 global financial crisis that triggered chaos in many debt ridden European economies such as Spain, Portugal, Greece, Italy, etc. and resulted in Euro losing its value by nearly 20% and of post-Brexit uncertainty leaving the Pound Sterling devalued by almost 15%. In both cases the European and the British leadership stood up to the challenge in not only keeping inflation under check, but also in using the opportunity to spur industrial output by managing interest rates through quantitative easing. As a result we are today witnessing a complete revival in fortunes of both the Euro and Sterling.
Ours though is in fact a peculiar case. The saga started with the non-visionary and rather stubborn policies of Ishaq Dar who refused to address the issue of competitiveness with or without using the tool of devaluation. At his time it was not so much a case of outright devaluation of the Pak rupee but more to do with comparative devaluation, since most global currencies of the time, Euro, Sterling, Turkish Lira, Malaysian ringgit, India Rupee, Nigerian Dollar, Brazilian Real, etc. had shed value against the US Dollar, whereas, the Pak Rupee being closely linked to the dollar basket was artificially holding ground. In addition, the global oil prices were at an historic low and since Mr. Dar was reluctant to use any other tool either to address export competitiveness – like releasing refunds/liquidity, removing unfair surcharges and taxes, undertaking customs reforms to help imports of materials meant for re-exports, etc. – a gradual devaluation of between 5 to 7% would have been ideal at the time; as was also recommended by this writer. However, his short sightedness in refusing to organically address the problems in our trading account coupled with free flowing and in most cases un-supervised CPEC debt has overtime left the Pak economy with a problematic external account and at the same time with no real export surplus to show for. His successors now perhaps want to prove a point by naively resorting to the very measures that he had fiercely resisted, as if by doing so they will redeem themselves in the eyes of the critics who had opposed Mr. Dar’s policies at the time. What they do not realise is that global realities have since changed. Any student of economic history will tell you that there exists no empirical evidence to support the notion that devaluation bears any direct or sustainable correlation with increase in exports. At best it can be used as a controlled tool to become a catalyst or simply be regarded as one of the many factors in an overall strategy to boost exports. For this reason alone it needs to be handled with care to ensure that the negatives from a devaluation exercise (or from the extent to which a currency is devalued) do not outweigh the positives. And it is in this context that one needs to evaluate the two current rounds of devaluation. There are 3 major concerns that immediately come to mind. First, its size: Meaning, that not only its extent is much higher than it seems, but also that there is no clarity on its closure. If the devaluation is looked at in terms of Pak rupee’s parity with leading global currencies other than the US Dollar, one finds that the erosion is much higher, especially when USA is no longer our largest trading partner; e.g. around 19% against the Sterling, 25% against Euro, 15% against CHF, and 18% against Czech Crown, and one is still not sure where it will end –uncertainty as we know is always an economy’s worst enemy. Second, timing: The devaluation couldn’t have come at a worst time when oil prices are rising, Pakistan’s massive foreign debt is fast maturing (with a significant portion being non-dollar based), and the world in general is turning ‘protectionist’. Third, lack of clarity: In an action where the government itself has downgraded national stock, no tangible figures or targets have been provided to explain what precisely (in number) terms will this devaluation achieve for the economy. Also missing: an accompanying management strategy to control inflation; is an identification of key sectors where prices will be controlled and how (price increase announcements followed in less than 24 hours); are the support initiatives to overcome renewed barriers (due to devaluation) to investment and introduction of new technology; are specific dollar based export enhancement and import curtailment numerical targets; are new/revised direct support measures for poorest of the poor; and last but not least, is the future debt-servicing plan. Meaning, the present leadership in guaranteeing the touted benefits of this devaluation is assuming no responsibility!
Finally, one is not comfortable with the rationale of such a major decision at a time when this government is almost at the end of its tenure. For nearly 5 years as a ruling party it stood against the devaluation and now in its last 3 months even if the new boys felt differently, ethically they should have waited for the new government to undertake such a major step, as you need years and not months to manage such a major policy measure. Add to this the confusion on ownership in a maze where the sitting prime minister considers the ex-prime minister as the real prime minister and the ex-prime minister who is the real prime minister is publically claiming that the devaluation would never have happened under his watch! And this takes us to Management-102 lesson: “Every initiative is doomed for failure without proper ownership!”
The writer is an entrepreneur and economic analyst.