This government is facing a decline in the rupee for the second time in its three-year tenure, not to mention runaway inflation and rising inflation which are clear signs of the regime’s political failures.
In the first year of his tenure, the rupee fell from its August 2018 value from Rs 124 against the dollar to over Rs 168.50 against the greenback. However, it rebounded and started trading at Rs152 against the dollar over the next 12 months.
After a relatively stable period, over the past four months the local unit has experienced a roller coaster ride, falling to an all-time low.
The key rate of the State Bank of Pakistan (SBP) was 7.5% when this government took office. Interest rates continued to rise to 13.25% until the novel coronavirus disease Covid-19 hit the world.
Interest rates have returned to 7%, 2-3% below prevailing inflation. This key rate was maintained for a long time despite the fact that the rupee started to fall slowly and then fell sharply.
The SBP acted very late and nominally increased policy rates by 25 basis points to 7.25. The rupee, however, continued to remain under pressure.
When this government took office, it inherited a large current account deficit of approximately $ 20 billion. It took drastic measures to control the deficit.
The government has imposed regulatory taxes on many import items and luxury imports. He asked the importers to deposit the full amount of the import at the opening of the letter of credit. Many other measures have been taken to curb imports. Finally, the current account deficit was wiped out. In fact, we had a current account surplus for a few months.
On the strength of its trade regime, the government began to ease import restrictions. Many regulatory fees have been eased and the trade regime has been liberalized.
Policymakers have gone so far as to allow the importation of electric vehicles at zero or nominal tariffs. Trade liberalization has started to wreak havoc on the current account deficit. Pakistani imports exceeded $ 6 billion per month in June and August and nearly $ 6 billion in July.
Exports have grown, but at a much slower pace than imports. This despite the fact that the government has done a tremendous job of motivating foreign workers to send money through official channels.
Remittances grew by $ 7 billion per year during his tenure, helping to contain the deficit. In fact, remittances became the main source of export income during the PTI regime.
When the government announced the electric vehicle policy, the domestic industry warned planners about the consequences of importing expensive vehicles that would likely not reduce pollution – how importing 3,000 to 4,000 vehicles electric vehicles reduce pollution, as more than 4 million non-electric vehicles are driven in the country
It was only a pleasant exercise for the elite because only the richest of the rich could afford it. They were helped by a tariff exemption of billions of rupees. The government, on the one hand, tries to please the poor through non-transparent subsidies, few of which reach the deserving.
On the other hand, it appealed to the wealthier segments by allowing them to import electric vehicles at nominal rights. This appeasement was not necessary because the rich were already satisfied with the state which allowed them to plunder the common man without taking legal action.
In the first two years of import cuts, GDP growth was compromised, reaching 1.9% in the first year of this regime and minus 0.4 in the second year.
He had to liberalize imports to free growth and also succeeded, but at the cost of depreciation of the rupee and high inflation. Cautious governments strike a balance in their policies to achieve a compromise on growth, welfare, dollar rupee parity and inflation.
This government is used to taking extreme measures which drastically disturb the economic balance. In the first phase, its policies resulted in a 150% drop in growth in the first year and negative growth in the second.
In the third year, growth jumped 400 percent (from minus 0.4 percent to 3.94 percent). 2% growth would have maintained stability. Isn’t it ironic that at 3.94% growth our planners say the economy is overheating? It says a lot about our economic strength.
The Indian or Chinese economy which also plunged after Covid-19 into the negative zone has not overheated by returning to high growth of 6 to 7%.
Bangladesh’s economy is in the normal zone with growth of 5.7% after the decline of Covid-19. Our planners should go back to the drawing board and assess the flaws in our policies instead of changing them at their whim.