Dollar flight

The fear of flexibility in the exchange rate has been shared by most, if not all, our Finance Ministers.

                Keep the dollar flying i.e keep it relatively expense. Why not keep the rupee flying i.e keep it relatively over valued?. There are very simple reason to prefer the former approach our the latter to keep our economy flying, rather than having a crash land. To understand the reasons, imagine you are a businessman with two choices. The first choice is to start an import business. The second is the Export business which one will you choose in our country? Import or Export?. Many will choose and are still choosing the Import Business because it requires little investment and is much easier to setup. Very few will choose the Export Business because it requires huge investment and is difficult to setup. Is it is too difficult to see this ground reality?. This is one of the primary reasons to keep the exchange rate more favourable for Exporters. Keeping it consistently more favourable for Exporters also helps producers, thereby promoting industrial growth.

                For decades and beginning in July 1949, hardly eight months after the death of Quaid----- our policy makers choose to deliberately keep the rupee overvalued by not devaluing it despite the UK having devalued the sterling by 30 %. All common wealth countries did so except ours. The Pound Sterling became cheaper in Pakistan, and import the pendency began under the guise of the then fashionable l(Import Substitution strategy), since then, our country has been a trajectory of faster Import growth, slower or stagnant export growth, mounting external debt necessary to finance the gap between imports and exports, and consequently  boom-and-bust cycles of growth.

            Our exchange rate has historically favoured importers at the expense of exporters. Yet we continue to lament our poor export performance. We seem to prefer the easier approach of lamenting rather than taking difficult decision of keeping foreign exchange consistently expensive. Should be also congratulate ourselves on our extra ordinary Import growth performance?. Our politicians, policy makers, Bureaucrats and many economist (of National or Media Repute) continue to delude themselves that the expensive dollar is mostly the work of speculators, and needs to be stabilized (a euphemism for keeping the dollar from flying, or keeping it nearly fixed).

             Many economists continue to continue strange arguments such as deprecation to leads increase debts they failed to see that by not depreciating in time we fuelled Import consumption in the first place which was mostly financed by increasing the external debts. Many still believe that Exports do not respond to the exchange rate based on silly econometric regressions. The fact is that Exports respond slowly to depreciation compare to Import because of the reasons stated in the first paragraph. Many continue to say that Import content of our Exports is very high but never question why it is high. It is highly primarily because of the mostly consistent historic favourable exchange rate for Import that is overvalued rupee. Pakistan establish managed floating regime in 1982 as a result our trade balance improved between 1982 and 1998. Had the rupee shown more flexibility in the exchange rate during this period our country would have developed a strong diversified export base. Moreover one would have expected a batter trade balance performance when Pak Rupee was official floated in 2001 but soon after the fear of floating set in ferociously in the minds of policy makers and the rupee hardly moved from about 60 to a Dollar making it defecto peg putting the economy again in the pre 1982 fixed exchange rate regime.

                This fear of floating, benefitting Importers at the expense of Exporters played havoc with the trade deficit and the economy crashed with the ownslaught of the global financial crises of 2007-08. Foreign Exchange Reserves vanished quickly. The I.M.F had helped stabilize the economy and the rupee became somewhat flexible again from 2008 to 2013. Fear of floating set in again and the Dollar was deliberately kept cheaper between Rs.98 and 104. The story repeated itself trade deficit rose and reserved depleted. What was mind boggling was how the savings from the dramatical fall in the International Price of Oil (From 100 US Dollar per barrel in 2012 to 40 Dollar in 2016) were wasted in spotting the rupee and the increasing Imports. No wonder Exports decline or stagnated during 2013-18.

                The I.M.F helped again. The rupee showed flexibility and economy was stabilize. The State Bank of Pakistan has introduced a sensible mechanism of market fear of floating seems to have set in again. This fear is evident in the remarks of Finance Minister Shaukat Tarin that the dollar should cost no more than Rs.165, instead of the current market value. This fear of and disdain for flexibility is not new and had been shared by most (if not all) of our past Finance Minister. Sadly, this fear is also reflected in the remarks of various economists of national repute.

            As a result, the State Bank of Pakistan will undoubtedly come under pressure to intervene. If this happens, it will lead to depletion of reserves leading to another balance of payments crises. I hope this does not happen. I wish the State Bank will be allowed to do its job independently. Our Prime Minister is a courageous man. He has asked all the Pakistanis to not be afraid of so many things of rising value of the dollar?. Trust the State Bank of Pakistan is managing the exchange rate independently. Very few public sector institutions can claim a competent staff and an experienced and knowledgeable board of directors like State Bank of Pakistan. Let the rupee float. It requires tremendous and continuous patients less independency on Imports, promote Exports, enhance reserve and contain the external debts if wishes were horses, our county would surely been Asian Tiger now. If the wishes of Finance Minister become the horses of the State Bank of the Pakistan, our country is unlikely to come out of the boom and bust cycles of economic growth.