There is a distinct sense of déjà vu regarding the current economic situation, calls for devaluation and new import tariffs.
There were similar calls in 2007-08, when the economy was in serious difficulty and our foreign reserves plunged to $3.4 billion (enough to cover just one month’s imports).
At the time the government obliged by devaluing the currency by 28 per cent and raising import duties on a large number of products by 15-50pc.
In each previous instance, abrupt devaluation brought about economic distress, which lasted for several years. There is no justification in repeating actions that have failed in the past
But such measures failed to increase exports or improve the balance of payments. Despite these measures, the then government had to seek a $7.6bn loan from the IMF.
While the IMF loan solved the balance-of-payments problem temporarily, the economy that was growing at over six to seven per cent prior to 2007 plunged to one of the lowest growth rates and stayed that way for a number of years.
Devaluation resulted in huge new debts and the new import duties pulled down exports. As a result the country was pushed back several years. Since other neighbouring countries did not resort to devaluation or imposing new tariffs, they continued to flourish.
Consequentially, the gulf between them and us grew bigger.
A similar situation is arising now. The experts who had advised the government in 2008 and 2011 for devaluation and higher import duties are now recommending the same. Applying the same measures as was done previously would be counterproductive.
There are many reasons why devaluation and raising tariffs have been detrimental to Pakistan’s economic development in the past. Some of these are summarised below.
First, the country’s imports are inelastic and a weaker rupee will not help. Mostly, they consist of raw materials (petroleum, chemicals and metals), intermediate goods or machinery. Any devaluation would increase their cost and thus make Pakistani exporters less competitive.
Secondly, devaluation will raise the cost of servicing our external debt. Currently it is estimated to be around $70bn. If the rupee declines by 25pc, so will the external debt in local currency.
According to government figures, devaluation of rupee during 2008 to 2013 caused the debt to swell by Rs1.909 trillion in local currency. Thus, devaluation instead of easing the balance of payments will further exacerbate it.
Third, devaluation always increases inflation as essential items such as petroleum, food and chemicals constitute almost half of our total imports. When elections are around the corner and there is so much instability, can the government afford to make life more difficult for the poor and the middle class?
Fourth, it has taken the country almost 10 years to rebuild investor confidence to an extent. International investors are gradually making a comeback. Their investment in the local stock exchange reached a 15-month high last week.
It’s the same with foreign direct investment. After a long period of decline, exports have started inching up. The recent State Bank survey shows that the Consumer Confidence Index has risen by 5.07pc compared to the previous survey conducted in July. If the currency is devalued, it would send a negative signal to potential investors.
There is a misplaced impression that a lot of ‘luxury goods’ are being imported. The proponents of this notion often refer to high imports of ‘food items’ worth over $5bn and mobile phones of $500m. However, a closer look reveals that most of the food items imported consist of edible oils (about $2bn); pulses ($831m); tea ($517m); infant milk ($235m); spices ($118m) and other such products.
As for the mobile phones they can no longer be considered luxury goods but are essential for our economic progress. Already, they are taxed at very high rates and consequently almost half of them are smuggled in. If the taxes are raised further, almost all of them will come through smuggling.
The government also has to assess whether there is indeed panic brewing, as is being claimed by certain quarters.
According to the central bank, Pakistan’s reserves at the start of the current financial year were $20.223bn. At the end of September, they are almost at the same level. Of course the reserves did touch $23bn in 2016, but prior to that they had never been in excess of the current level. In view of this, the panic calls are not justified.
In any case if past instances can teach us a lesson, it is that devaluation and imposition of additional tariffs only aggravate the situation further.
In each previous instance, abrupt devaluation brought about economic distress, which lasted for several years. There is no justification in repeating actions that have failed in the past.
— The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008
Published in Dawn, The Business and Finance Weekly, October 9th, 2017