THE GREENBACK SAGA

Pakistan’s Federal Minister for Finance, Ishaq Dar, at a news conference, proudly announced that the ‘difficult period’ for the economy was over and that the prices of all items ‘from onions to the dollar’ has declined which would have a major positive impact on the domestic rate of inflation.

The indicator used to express his optimism was the declining greenback. The dollar fell from almost Rs. 110 to as low as Rs. 98. So what decisions did the government take that may account for the significant appreciation of the Pakistani rupee?

The sales tax on foreign exchange transactions imposed by the Sindh and the Punjab governments was agreed to be withdrawn during the last meeting of the CCI on Dar’s request, who had argued that the rupee would not strengthen in the external market until this tax is removed. But it’s unclear whether a notification to this effect was issued by the two provincial governments given that Sindh had opposed the move on the grounds that a tax on services is a provincial subject though in anticipation of such a notification the rupee value may have appreciated; but certainly it would not have appreciated by as much as has been evident in recent days. The government banned the import of gold as a means to check smuggling of the commodity to India that was having a negative impact on the domestic currency, however, this decision was taken in January 2014 and it is doubtful if its impact fuelled a rapid rupee appreciation that began less than a week ago.

There is no denying the fact that the strengthening of the rupee baffled economists because the fundamentals of the economy didn’t changed apposite to the dramatic and unprecedented appreciation of the rupee; these include:

(i) a rise in remittance income average inflow between July 2013 and February 2014 to $1,280.6 billion in contrast to $1,154.3 billion in the comparable period in 2013, however, remittances have been steadily rising for the past two years or so;

(ii) trade deficit declined by 4.89% in past seven months, reflecting a 6.2% increase in exports and a 1.17% increase in imports’ a rise that is not sufficient to explain a rupee appreciation though exporters sold their currency as the rupee began to strengthen and did not delay bringing their earnings into the country to maximize their rupee value;

(iii) growth rate on the IMF website is 2.5% for 2014 though in a press release dated 9th February, the Fund indicated that the rate may have improved to 3.1% premised on the quarterly data shared with the Fund and not 3.3% cited by Dar during the press briefing. Be that as it may, Jeffrey Franks had stated that the Fund would evaluate the quality of the quarterly data presented by the Pakistan Bureau of Statistics and currently two members of the Bureau are in the US; and

(iv) the government’s domestic debt and liabilities rose from Rs. 6,226.4 billion in June 2013 to Rs. 10,749.7 billion in January 2014 reflecting an expenditure revenue trend that compelled the government to borrow heavily from the State Bank with severe inflationary consequences.

It is relevant to note that even though tax collections have risen by 17% compared to a year ago, yet the 1% rise in sales tax accounts for the bulk of this rise with many also arguing that the rise under other heads is due to advance tax collections. Current expenditure, too, has not been curtailed.

So, what went so very right? The Finance Minister referred to a large inflow from a friendly country that he did not wish to be named. Nevertheless everyone knows now that it is actually Saudi Arabia. However, it is unclear whether this amount is a grant, a loan or indeed an advance for services to be rendered as the relevant website is silent on this inflow. However, it, in itself, would account for as a prime mover for the rise in the rupee value and is being viewed as vindication of view within a section of the business community in particular that assumption of reins of government by Nawaz Sharif would auger well for the economy. A look at M2 (an indicator used to measure money supply in the economy and includes currency in circulation, other deposits with SBP, demand and time deposits including foreign currency deposits with scheduled banks) indicates a dramatic decline in government borrowing from the SBP ‘from Rs. 2,212.9 trillion by end of June 2013 to only Rs. 185.7 trillion by 28th February 2014.

The question then becomes whether the rupee appreciation is sustainable. Yes, it can be sustainable if the government begins to revisit its expenditure and revenue generating policies. Current expenditure needs to be curtailed massively and development expenditure should be allowed to become the engine of growth while tax system needs to be rendered equitable, fair and non-anomalous. Reforms are still awaited and so far there have only been cosmetic changes at best.