‘Pakistan, Forex & Musharaf’ by Kalwar on Teeth Maestro

@ A.H.Kalwar

First, I must acknowledge Kalwar’s attempt at analyzing the problems of our current economic situation, though not completely correct in the manner he has connected all of the dots. First, the exchange rate policy that Pakistan has adopted, since our last IMF program which was initiated in the 90s, is that of floating exchange rate (though it’s not been practiced that way most of the time). In a ‘fixed exchange rate’ policy, the central bank of the country sets the official rate and all banks must stick to it. This was the policy that Pakistan had adopted in the 80s and in the early 90s until IMF came and suggested otherwise. If you remember, we don’t have exchange rate notifications released by the State Bank as they are done by OGRA for oil prices every fortnightly (now that is highly regulated). If Musharaf government ran the affairs this way, you would be right in claiming that he pursued a ‘fixed exchange rate’ policy, but it actually didn’t. Now, why I say that Pakistan’s foreign exchange rate policy isn’t exactly ‘floating rate’ is because our State Bank (on the advice of the government) pumps in dollars in the open market to keep it around a certain level. This may be termed as ‘attempting’ to regulate the exchange rate around a certain place but it can never guarantee it. If the flight of foreign capital speeds up, this method will hardly have any bearing on the rate.

Now let me comment on your claim that a high dollar rate boosts exports and reduces the demand for imports. Let me tackle the first part of this claim – ‘high dollar boosts our exports’. You are totally right at saying that a weak rupee would help our exporters gain a competitive price advantage in the international markets but please remember that it is only a short-term effect. As the Rupee loses its value, the domestic inflation gets a kick in the rear which forces the State Bank to readjust their discount rate – increasing the cost of production for the industries, which ultimately not only eliminates the short-term benefit earlier reaped by exporters but might even push their costs so high that they find themselves at a disadvantage against their international competitors. Now the second part of the claim – ‘reduces demand for imports.’ While the demand for some imports may reduce by weakening the rupee, this is the worst way to achieve that objective. You and I know that the government has a wonderful tool if it wants to reduce the demand for a certain category of items and this method can be used very effectively to meet that end. It is called ‘taxation.’ The oldest rule in the economics book is ‘if you want less of something – tax it, if you want more of something – subsidize it.’ When one begins to look at reduced demands as a positive side effect of a weaker rupee, one has failed to register the impact of the same on imports of essential items such as machinery for industry expansion, raw material etc. Their increased import bill would pump the cost of production even higher, making them ever less competitive in the domestic or international market.

Moving on to your claim on the cyber bubble and the neglected sectors by the Musharaf government. First of all, the cyber bubble was solely a phenomenon of the American stock market and didn’t have as far reaching effects on the global economy as to bring it to a halt or push it on the road to growth. It’s effects as perceived by you are arguably over exaggerated. Second, you may be right at saying that Musharaf government gave priority to other sectors and not to agriculture. Here, I agree with you. But I disagree with the claim that it also ignored the manufacturing sector. Maybe you haven’t read the economic numbers of 2004, 2005 and 2006 when LSM (Large Scale Manufacturing) grew by over 15% every year. Over 15% growth! In 2006, only China had a higher LSM growth rate than Pakistan – in the entire world. That doesn’t come about by ignoring a sector. In 2006, our textile exports alone were more than $10 billion (just for comparison sake, our total exports in the 90s never reached that number). So to say that the last government ignored the manufacturing sector would be totally absurd. Yes, the focus was certainly more on banking and services and it is open to argument whether they needed that much focus or not.

And yes, Musharaf would do anything to keep his seat but so would any other ruler in a country where democratic institutions aren’t very strong. If you doubt my claim, please consult history. When you are in power, the only reason you give it up is when you know you can’t keep it no more. Only a few leaders in history actually gave up power because they believed someone else could do it better. In Western democracies, power changes every 4 or 5 years because the rulers know if they attempted to stay beyond their given time, their democratic institutions would put them behind bars. So Musharaf isn’t the most evil ruler for having done that – they all are the same – and I don’t mean to stay that what he did was right. It was wrong and cost our country a hefty sum in many respects. But to cast him out as Satan’s most favorite son and blame him for all of the problems is not only childish but also misrepresentation. And if you still doubt my assertion, please wait to see what Mr Zardari does when he feels the pinch. This is why the only solution for us is in stronger institutions.

Having said that, we must acknowledge that during Musharaf’s tenure, the government seemed to have a vision and a set of policies. Their policies might not have been all correct but there were many positives in their initiatives.