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Macro uncertainty looms in Pakistan while international optimism reawakens

By Muzammil Aslam

December 3, 2018 (MLN): Theoretically, a strong policy action results in rallying markets and higher investors’ confidence. However, when policy actions are executed under pressure, they ultimately breed confusions in the markets.

In an unexpected turn of events, SBP surprised the markets through 6% devaluation and an aggressive rise in policy rate, by 150 basis points to 10%. It is very rare for any Central bank to take steps on monetary & exchange side simultaneously. Experts believe that this unusual move is a part of the pre-conditionality of IMF program. Moreover, the government’s optimism on arranging bilateral funding from China & UAE is also losing its spark, hence pushing the government to comply with IMF demands.

The question that arises is that, will this exchange rationing & monetary tightening produce required macro outcomes? Understandably, the answer is not very straight forward, since 28% devaluation before November 30th has failed to boost exports, at the very least.

Exports in the first 4 months jumped by merely 4.5%, while no material respite was witnessed in imports. Hence C/A deficit is still hovering near last year’s level. In my opinion, government is not realizing the fact that we don’t have enough surplus exports due to growing population and lower productivity growth in the commodity producing sectors, in the last many years.

Discouragingly enough, we are the importers of net services which cannot be contracted with monetary & exchange tightening in the short run.

Apparently, to avert the Balance of Payment crisis, the government is ready to compromise on economic growth, which is also hinted by SBP in the monetary policy statement. SBP expects slightly more from the 4% GDP in FY19. The chief reason is due to shortfall in major crops. I am wondering if SBP is projecting the commodity sector slowdown, how in the world we will manage to escalate exports?

In my opinion, SBP’s aggressive monetary tightening will also hammer government’s efforts of squeezing fiscal deficit from both revenue & expenditure side. With the hike in interest rates, government’s current expenditure in shape of higher debt servicing will increase by Rs.400 billion or 1.2% of GDP.

Meanwhile, less than projected growth estimates will further make meeting revenue targets a challenge. Not to forget, the Large Scale Manufacturing (LSM) has contracted in the first 4 months of current fiscal.

To be clear, above arguments are not formatted to criticize the steps taken by SBP. Actually, the issues are not simple. While we do need tightening, I believe it has to be done creatively so as to balance the growth & deficits.

How to create balance?

Balance of Payment crisis is by and large due to stationary exports. We are relying too much on textiles. Instead our efforts should be more on other commodities. Imran Khan has spoken about Halal meet market and exporting tourism, I believe he can add fruits in the list. Pakistan produces one of the best fruits in the world. But lack of storage is resulting into huge waste of our fruits crop.

Similarly, like halal meet there is a huge fresh juice markets that we have failed to capture. Mining of Coal, minerals, copper & marble. Ignoring the two important provinces Baluchistan & KP is depriving us of un-exploitation of the huge reserves we have. Huge labor force, can be used in arts & crafts.

Already Pakistani carpets, footballs and surgical goods are recognized worldwide. We can add a lot more value on these fronts. Pakistani foods are famous all around the World. National and Shan foods masala recipes are very popular internationally. Why can’t we start exporting the cooked package food globally? The universal trend has shifted and people buy readymade food rather than ingredients, and this is at least 20 times bigger a market than halal meat.

Lastly, we have resources and surpluses but lack vision, government support and direction. Pakistan can generate current account surplus and I have no doubts about it.

Copyright Mettis Link news

Posted on: 2018-12-03T10:37:00+05:00

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