Imran Khan has always been a strong critique of earlier governments’ economic policies .He used to speak about IMF loans and promised not to knock the doors of International financial institutions once he comes to power. Before the elections, the much celebrated Asad Umar was presented as an economic wizard who, according to PTI, would steer the sinking ship of Pakistan’s economy to the islands of prosperity. Once he entered the office as finance minister, much to the PTI’s disappointment Asad was not liked by a certain group as he had decided to cut their budget share. Even the question of Asad’s qualification was raised as he belongs to the management sector holding an MBA degree. The group argued that Asad cannot be an expert of economic and financial matters. Finally, he stepped down from office and Hafeez Sheikh took over as Advisor to PM on Finance.
With PTI government coming to power, rupee was devalued from 115 to 160 per U.S dollar. This was done as a measure to boost up the Pakistani exports as the devaluation of the local currency makes the exports cheaper abroad .Despite this, the Pakistani exports did not see any increase in their volume. The reason for this is the lack of new manufacturing facilities. Pakistani exports have already become less competitive due to the Indian and Bengali products where cheap labor is available and their governments provide uninterrupted electricity and gas with subsidized rates. Even if our products become cheap our industrialists cannot meet the demands of foreign dealers due to limited manufacturing capacity.
Secondly, interest rate was raised from 5.75 pc to a staggering 13.25 pc. This was an increase of 750 Basis points (BPS).The devaluation of 40 pc of rupee did not help in increasing our exports due to the high interest rates. When the interest rates are high the investors are reluctant to borrow money from the banks and set up new businesses. Resultantly, there will not be any increase in manufacturing sector, no new employment and limited GDP growth. Thus, Pakistani exports remained there where they were.
Another disadvantage of the high interest rate is the inflow of “hot money” into the economy. People borrow money from those countries where the interest rates are low and invest in those countries where interest rates are high. Once the interest rates are lowered in the country where investment is made, then people will suddenly pull out their money depleting the foreign exchange reserves and depreciating the local currency.
Before the Corona pandemic, once the interest rate was 13.25 pc in the country, Pakistan attracted a huge amount of $ 4.13 Billion “hot money”; invested in debt and equity market. When the Govt. gradually lowered the interest rate to 8 pc as a relief measure to the investors and businesses, the country saw an outflow of $2.98 in just two months. Even the interest rate of 8 pc is very high in this pandemic and slowing of economy .The Federal Reserve (U.S Central Bank) has brought interest rate to zero and there are negative interest rates in Germany and Switzerland. Almost all the developed countries have dramatically lowered their interest rates to come out of this pandemic driven recession.
To conclude, devaluation of the Pakistani rupee is not the panacea of all the economic ills of the country. Pakistan has been less efficient and less competitive in the manufacturing sector. The past governments have not paid attention to this sector. That is why our exports have never crossed the benchmark of $25 Bn. To increase manufacturing and investment, the government should reduce interest rate as low as possible .High interest rate with the inflow of hot money may provide a temporary relief to the ailing economy, but will have negative impacts on the economy in the long run.
The writer is an M.S scholar, pursuing his degree in Economics from University of Balochistan. He can be reached at firstname.lastname@example.org
DISCLAIMER: The views expressed in the article are that of the authors’ own and do not reflect the policy of Bolan Tribune.