A stable foreign exchange rate helps stimulate long-term fixed investment while a prolonged, abnormally fluctuating value of the national currency tends to distort the financial viability of projects with longer gestation periods.

And a stable currency, with minimal fluctuations, is necessary for the success of any long-term economic growth strategy as amply proved by China. For Pakistan, keen to launch the second phase of industrialisation under the China-Pakistan Economic Corridor umbrella, rupee stability assumes added importance. While claiming the economy is moving in the right direction, the policymakers also have expressed satisfaction that the rupee is stable.

Unlike in the past, foreign companies are reported to be largely remitting their profits to parent companies instead of ploughing back a significant part of their earnings into investment. In the 11 months of 2020-21, the outflow of profits and dividends on foreign investment increased by 23 per cent to $1.5 billion, up from $1.215bn in the same period of the previous year. While generally corporate profits have gone up significantly they are not reflected in the sluggish pace of investment. During the period under review, the foreign direct investment (FDI) has fallen by 28pc to $1.75bn.

A stable currency, with minimal fluctuations, is necessary for the success of any long-term economic growth strategy as amply proved by China

With the economy entering the growth mode, the private sector borrowing from banks jumped by 196pc to Rs489.4bn up to June 18, during 2020-21 but was still lower than 2018-19 level of Rs693.5bn achieved before the Covid-19 outbreak. Corporates raised Rs80bn from Pakistan Stock Exchange — Rs50bn from flotation of rights shares, Rs20bn from a 12-year high Initial Public Offerings and 11bn in debt. As this indicates, companies borrowed funds primarily for the expansion of their production capacities.

According to the Pakistan Economic Survey 2020-21, capital goods and raw materials have been the main imports in 2020-21 which, in turn, helped in the growth of exports as well as domestic recovery. And to elaborate plants, machinery and equipment are primarily imported for refurbishing existing production facilities.

The PTI-government needs to relink the exchange rate to lower core inflation rate (excluding food and oil prices ) as was the earlier established practice instead of higher headline inflation adopted under the International Monetary Fund’s (IMF) current conditionality.

Finance Minister Shaukat Tarin says that the Fund has shown’ flexibility’ in its stance and the IMF spokesman in Washington affirms that “we stand ready to continue to support Pakistan in achieving its objectives of debt sustainability and strong growth.” The Fund should let the core inflation set the exchange rate to reduce the rupee cost of debt servicing and take a needed step towards making private investment cost-effective in view of rising international prices.

The enormous rupee depreciation under PTI stewardship was recently followed by the rupee gaining both value and relative stability for a very brief period — as long as the current account was in surplus.

As trade and current account deficits started widening on a month-to-month basis, the rupee started losing value. It fell from Rs153.5 per dollar by end of April to Rs158.30 on June 27. The national unit gained 50 paisa the next day.

Since the shift from fixed parity to flexible exchange rate adopted globally decades ago, economic growth has become much more problematic than before. Unusually, prolonged fixed parities also led to excessive overvaluation of the rupee as happened in the case of Pakistan during the development decade of the 1960s and led to substantial devaluation in the early 1970s.

Apparently, huge devaluation plus regulatory import duties did not help cut costly imports on a durable basis nor encouraged import substitution in any noticeable way. Nor have exports increased to expected levels owing to the challenging domestic and international business environment created by Covid-19 and the preceding weak recovery from the 2007-2008 international financial crisis. In fact, the value of imports of goods is rising at twice the pace of export earnings.

In a meeting on June 28, a concerned Senate Standing Committee on Commerce asked the commerce secretary to explain reasons for stagnant exports, which according to a committee member, has remained stuck at the 2013 level of $24bn in 2020-21.

A Pakistani political economist settled in the US says “while the free float of the rupee will cut current account deficits, it will fuel inflation too, and won’t end current account deficit fully.”

Looking at 11 months of performance of 2020-21, the merchandise trade deficit rose to $24.14bn from $19.12bn compared to the same period of 2020-21. The current account surplus was reduced to $153bn with deficits rising since December that shot up to $632bn in May. The real issues in exports of goods persist on both supply and the demand side. On the other hand, exports of telecommunications, computer and information services increased by almost 48pc to $1.9bn during the period under review.

Notwithstanding the current account surplus, record workers remittances and increase in exports, the government borrowed over $12.13bn during July-May, up from $7.44bn a year ago. In the first nine months of 2020-21 the costlier borrowings from commercial banks rose to $3.61bn, debt servicing amounted to $10.63bn and are expected to reach $14bn for the entire fiscal year. The rising level of external debt is providing short-term relief while enhancing the country’s sovereign risk and making borrowing costlier. To quote an opinion piece, “Pakistan’s economy remains fragile on massive borrowings.”

“The balance of payments was salvaged by a slowing economy and hence, low imports were buffeted by high remittances,” says an Institute of Business Administration (IBA) study. The researchers warn that “increasing imports reaching $60-70bn (in 2021-22 ) will be Achilles heel of the economy as remittances are unlikely to show markedly growing trends.”

As excessive imports are a major problem, a view has emerged that successful import substitution should precede export-oriented economic growth.

Huge devaluation has created adverse terms of trade resulting in an enormous outflow of wealth abroad from a cash-strapped and debt-stimulated economy suffering from low levels of investment, production and exports as well as import substitution. In terms of dollars, exports are made cheaper for foreign buyers and imports become costlier for local industrial and other consumers.

In the past ‘cosmetic measures’ were adopted to tackle boom and bust cycles that, according to a working paper prepared by a central bank expert, ‘gave the pretence of stability but made future instability inevitable.’

The point, the study observes ‘is to sustain stability once achieved.’ It sees the manufacturing sector as the key to long-term development as demonstrated by the historical global experience of successful development.

Published in Dawn, The Business and Finance Weekly, July 5th, 2021