Until recently the industrial investors were agitated by the perennially falling rupee and perpetually rising dollar and held the unstable exchange rate of the rupee as an index of the instability of the economy.
But now, fortuitously, the stability of the rupees which was racing down towards to 70 to dollar before September 11 has been achieved and the negative process positively reversed, and the rupee has come up to 59.90 to a dollar they are protesting against the loss of their export earnings in rupees.
Exporters of textiles, in particular, are upset at the world prices of textiles which have come down by 20 per cent, while they are losing 7 per cent more as a result of the new appreciation of the external value of the rupee - a loss of 27 per cent which they cannot withstand for long, they say.
Textile exports in February fell by 10 per cent and worse may follow in the coming months making the goal of achieving 10 billion dollars exports this year too visionary. What is more likely, they say, exports at best this year may come down to 8.75 billion dollars against last year’s 9.2 billion dollars.
The government is not wanting in promotional efforts to help textile exporters. But the All Pakistan Textile Mills Association say they were not consulted before President Musharraf left on his four-day tour of Japan. During his more frequent visits to the US, commerce minister Razak Dawood did try hard to boost textile exports. but in the US Pakistan ran into a virtual stone wall despite the sympathies of the US Administration for Pakistan. The indomitable Senator Jesse Jackson as champion of the cheap textile producing areas stood in the way and had delayed the law which the US Congress has to make to facilitate larger textile imports from Pakistan and on a lower tariff, as agreed in principle with the government.
While the president did not consult APTMA. Its demands are well known to the government, and solutions to some of those problems have to come from within the country and not in Osaka or Tokyo. But he did take major textile exporters like Aziz Memon with him.
And the fact is Japan has no quota system for textile imports and in fact some of its textile industry has been dismantled and relocated in countries like China, India and Vietnam. Pakistan too might have got its share of relocated textile units if the law and order situation was better and the infra-structure adequate. The fact is the world is changing fast, and we are too slow to change or get better.
When the governor of the State Bank of Pakistan addressed the Lahore Chamber of Commerce and exhorted them to export far more, they said high rates, of interest were a major deterring factor for export growth, And he said that when Pakistan achieved exports of 8.5 billion to 8.7 billion dollars between 1995-1996 and 1997-1998 the rate of interest was 21 per cent - following the stiff measures initiated by Moeen Qureshi as caretaker prime minister in 1993. But that could be because of variety of factors, domestics and external,including cotton prices at home and abroad were low. But the need for reducing interest rates is not disputed.
In fact Dr Ishrat Hussain is in the vanguard of the movement for reducing interest rates and has brought the cost of export refinance to 7 per cent from 14 per cent a few years ago. And he wants the banks reduce their intermediation rate further; but the large bad loans and the high taxes on banks stood in the way. The tax on banks is to be reduced further through the next budget in June. Finance minister Shaukat Aziz has also confirmed it.
Dr Ishrar argues that if exports do not go up appreciably the foreign exchange reserve built up in recent months would be wiped out after three years when repayment of the rescheduled loans begin after the current reprieve given to us by the Paris Club expires.
The fact is that the foreign exchange reserve of over five billion dollars of official and private funds is not the result of large increase in exports or a dramatic rise in home remittances or larger increase in foreign investment. Instead that is the money gained from the US and others for budgetary support (700 million dollars from the US and 300 million dollars from Japan and other payments. and savings from rescheduling of the loans for three years by the Paris Club.
Dr Ishrat says that a political government might be tempted to use the money for populist scheme. We are not doing that and are seeking a larger reserve.
As a result secretary general of finance Moeen Afzal says this year we would be paying only 700 million dollars as loan repayments to the IMF, the World Bank and the Asian Development — instead of 2.5 billion to 3 billion dollars a year we used to repay. But when full repayment on the basis of the re-scheduled loans begin the total payments due would be far larger than the 700 million dollars that we are paying this year.
Dr Ishrat’s exhortation to the exporters is on the basis of the nemesis to come. He wants the exporters to avoid that by exporting more while the government tries for larger home remittances and higher foreign investment.
But the exporters have problems within Pakistan which have raised the cost of production, more so for the better products with the higher value added. Electricity charges are high and so are the transport rates. And there are far too many holidays stopping work too frequently.
In the textile sector, prices of cotton can be arbitrary. IN the past local prices were lower than world prices, and sometimes exporters had to pay an export tax so as to keep the cotton cheap for the textile mills. But in recent year domestic prices of cotton have often been far above world prices.
And it is not the growers who gain by that as much as the ginners who are a powerful lobby and manage to make the government force the Trading Corporation of Pakistan buy the cotton at higher than market prices. The government has now ordered the Trading Corporation of Pakistan to buy one million bales of cotton at about Rs 3 billion. And the government’s losses on this account can be large. The ginners are reported to have brought large quantities of cotton with a view to speculate and failed to profit by that. They did not try to export that cotton in time either. And now the tax payers are asked to pay the price of their folly.
Dr Ishrat Husain wants exporters to improve the quality of their products and design. They have also to look for new markets and increase the efficiency of their operations. All kinds of innovations had been tried in the past, including setting up export houses, which will specialise in exports. We wanted to profit by the Japanese experience but it did not work as our manufacturers want to be exporters as well. This kind of vertical cartel is not good for modern business, but our businessmen want to stick to their old ways. Since the dollar went under Rs 60 the exporters have been looking towards the State Bank for relief. They want the SBP to intervene in the market to raise the dollar above Rs 60 so that they can get more for their exports.
But a cheap dollar policy is good for industrial investment, repayment of loans and meet official expenses abroad. What the government should instead do, is to reduce the cost of production. That should mean cheaper electricity, lower cost of investment loans, lower POL prices, etc. and fewer holidays that disrupt work.
And while helping the existing industries to run we should also make investment in new capacity cheaper and induce far more persons to come up with new investment. The government is thinking in pragmatic terms in such areas but is slow to act to obtain quick results.
The problems of export stagnation have been with us for too long. So also the low value added in our exports. If we earn more by exporting wheat or rice, that should not make us complacent. The emphasis has to be on the value addition and job creation A monetary policy that has brought the rupee from 3.33 to a dollar in 1953 to Rs 60 to a dollar now has not been a successful policy. After we delinked from the dollar in 1982 and set it rolling down, the rupee has lost 50 to a dollar and that was calamitous.
The focus should now be on strengthening and stabilising the rupee and not pull it down far below the Bangladesh Taka Simultaneously the cost of production has to be kept low and the rupee has to command and sustain greater purchasing power.