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01 - 07 Sept, 2012
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ECONOMIC REVIEW
Depreciating Rupee
Eroding the competitiveness of local manufacturers
by SHABBIR H. KAZMI

Depreciating Rupee
I deally Pakistan should have been enjoying current surplus due to record inflow of remittances, exceeding US$13 billion during FY12. However, drying inflow of foreign direct investment and widening trade deficit have eroded this benefit. Since 2008 rupee has depreciated by almost 30% and faces fresh pressure due to eroding foreign exchange reserves. This is also because of repayments to International Monetary Fund (IMF).
Some of the policy planners and decision makers are trying to create an impression as if this has happened suddenly, but the fact is they were perfectly aware of these payments. It may be another thing that some of them are still thinking about entering into another standby arrangement with the lender of last resort. Pakistan may get a bailout program but it will not be without some stringent conditions. Therefore, it will still be better that appropriate measures are taken to put the economy back on track rather than hoping that the United States will help in getting the assistance at easier terms.
If policy makers have to come up a home grown plan, first factors contributing to higher trade deficit have to be analyzed. A quick review of the trade account shows that while imports are growing at a much faster rate, exports are not growing at the corresponding rate. Therefore, the policy planners have to come up with strategies that can help in containing imports and boosting exports.
Factors contributing to rising imports include higher oil imports, especially POL products because refineries are not operating at optimum capacity utilization. They suffer from liquidity crunch due to circular debt issue which doesn't allow them to import required quantity of crude oil. Instead of solving the issue a novice way has been found, import of larger quantities of furnace oil and other POL products. Since the country also faces closure of CNG stations, motor gasoline import is also on the rise.
Depreciating RupeeAdded to this is huge import of urea. Since gas supply of fertilizer plants is being curtailed and diverted to power plants, capacity utilization of urea plants has dropped to disappointingly low level. This could be best understood by the fact that the local plants are capable of producing 1.2 million tons surplus urea but curtailing gas has led to import of around the same quantity. Instead of country earning foreign exchange, nearly US$600 million were spent on urea import. Besides that the government had to pay bills of rupees subsidy.
It is known to all that Pakistan earns nearly 65% of its total export proceeds through textiles and clothing, but the industry is also a victim of bad policies. Experts have been saying that resolution of circular debt issue can help in ensuring uninterrupted supply of electricity at affordable cost. The issue can be resolved by containing electricity theft and improving recovery. It has been highlighted repeatedly that if distribution companies dispatch 100 units they get payment for 30 units only and remaining goes towards theft and unrealizable account receivables. Efforts to contain theft and improve recovery can help in strengthening cash flow of the distribution companies and improve payment to all the players belonging to energy chain.
It is often said that exports are proving grossly insufficient to finance imports. This is only because Pakistan has not been able to increase its share in global markets. Pakistan has a dismal less than 2% share in global textile trade. This is mainly because country has not been able to exploit its real potential. Pakistan is among the top five cotton producing countries but bulk of its textile and clothing export comprises of raw cotton, yarn and unprocessed cloth. This leads to two problems: 1) average price realization from per kilogram of cotton is low but more importantly 2) importers of semi finished Depreciating Rupeeproducts become Pakistan's major competitors in made-ups market.
Experts say it often looks there are certain groups having vested interest which deliberately delay crucial decision making and at times decisions taken cause more damage. Two of the most recent examples are delay in granting permission to export sugar and failure to finalize arrangements for export of wheat to Iran in exchange for crude oil/POL products. Iran had also expressed willingness to export urea and other chemicals in exchange of wheat.
It is on record that every year sugar, wheat and fertilizers worth millions of dollars is smuggled to neighboring countries. This is mainly because of highly porous borders and the difference of prices of these commodities prevailing in Pakistan and these countries. It is necessary to specifically mention that hawks are against opening up trade with India. However, they fail to understand that the size of informal trade is many times the size of official trade. The animosity between the two countries is maintained by the groups having vested interest but the ultimate losers are poor people of both the countries.
It is necessary to reiterate that nearly 40% of agriculture produce is rendered unsuitable for human consumption in Pakistan because of improper storage facilities, lack of logistics and poor farm to market roads. Even if half of this could be preserved from going stale, processed and exported it could fetch millions of dollars. This will on one hand improve exports and on other hand enhance income of the growers.
Experts are of the considered opinion that Pakistan's exports can be doubled by following a comprehensive strategy based on: 1) restoring competitiveness of the local manufacturers, 2) enhancing value addition, 3) containing wastages, 4) diversifying product range and 5) exploring new markets. In this endeavor all the stakeholders will have to play their due role but the government will have to take the lead. Trade and industry has been saying for a long period, "We don't want incentives but demand immediate removal of irritants."
It is necessary to mention here specifically that private sector has installed in-house power generation plants to minimize dependence of public sector distribution companies but the government is extorting billion of rupees are oil and gas development surcharge to compensate for the shortfall in revenue. Policy planners fail to understand that if economic activities remain subdued revenue collection just can't be improved.

 
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