When Mr. Ishaq Dar was brought back to head the finance ministry, political supporters of PMLN were certain the guru was back. Mr. Dar talked down the dollar, and for a couple of days it seemed the mighty dollar quivered and retreated. But then the reality of economic performance surfaced and endemic economic problems need bold, yet sensible, solutions, The Dar response was two fold, shifting attention to the trend in the economy rather than the emphasis on the quarterly numbers and more importantly to silently peg the Pak Rupee to the US dollar at a notional rate of Rs221 to the dollar.
During his last stint as the finance minister the idea of a managed float of the Rupee was used as a policy. Indeed this would normally help in making the exports from Pakistan competitive. In the previous years, when Mr Dar was the FM, the managed float worked because of dollar inflows from borrowings rather than trade surplus. during the period 2014 to 2018 Pakistan's total debt went from $77 billion to $110 billion largely to prop up the rupee.
Pegging the domestic currency works when two conditions are met; 1) the country had a large surplus of dollar inflows from investments and/or exports and 2) when exports are substantial and a pegged currency is needed to make them internationally competitive.
Clearly the exports were always under performing in the period 2014 to now and this is shown by the trade deficit has grown from $2 billion monthly in 2014 to over $5 billion a month now. So one cannot see that benefit the pegged rupee brings to a country where exports have declined to abysmal levels. Countries like China have developed to hold the pegged policy, like 66 other countries linked to the dollar, because they have a balance in their trade and their exports remain stable and robust. These countries use the surplus dollars to buy US treasuries and when their domestic currency needs support the US treasuries are sold and the proceeds used to buy the domestic currency.
One fails to understand why a pegged rupee policy is still being followed by Mr Dar other than to give a false perception of the economy doing well because the 'rupee' is stable. The lesson of finance is that window dressing only works so far you have the means to keep putting up the decorations and when you run out of dollars the house cards comes crashing down. Therefore it is vital that this managed float policy should be put aside and while there will be a collapse of the rupee it will at least be dictated by the market conditions and eventually will normalise.
The effort must be a broad tackling of the economy to bring back a direction to economic performance. One would like to see the following happen;
- Measures to increase exports.
- Encourage capital formation for industries in the export sector;
- Broaden the tax base and try and achieve a 3 % of population in 2023 and raise that to 4% of the population paying taxes;
- Manage the current account effectively and debt burden to be reduced.
- Effective measures to solve the circular debt issue that comes from the energy sector.
- Increase the national savings rate, which is miserably low.
