Now that the budget has been approved, the IMF program agreed, and the interest rate raised quite in line with expectations (sorry “market conditions?”), perhaps someone can finally answer a few important questions.
For example, since we entered into the program primarily to do something about the mountain of debt we have accumulated ($100 odd billion?), not to mention maturing repayment obligations (something like $35-40b over 2-3 years?), why on earth did the bailout program come with pre-conditions that necessarily inflate the overall quantum of debt?
Why debase an already collapsing currency, and further jack up already high interest rates (now the highest in Asia!), which will expand the dollar-denominated debt, so the IMF can save us from defaulting?
Please don’t say the rupee has to come to its fair value after years of the Dar peg to stimulate export earnings and all that. If that were true, the 37 or 40 percent that we have already milked the rupee over the last year or so would have breathed a little more than 1-2 percent worth of life into exports, wouldn’t it? Yet here we stand. The rupee pushed through the floor and exports have barely budged. So what’s further depreciation going to do?
And please let’s not kid ourselves about fair value, real effective exchange rate, and so on. There’s no way the economy, with barely enough in the kitty to cover a few months of imports even with the IMF program, can afford the rupee to drop to its real value.
That’s probably why the new state bank governor, brought in so he can finally make the central bank independent and autonomous, was pretty unclear when he tried to explain the future of the rupee.
It’s going to be left to market forces but, push come to shove, we will intervene, he said. But how’s that ‘leaving it to market forces’? And weren’t we doing pretty much the same thing all this time?
That’s also probably why nobody talks about reaching a floor under the currency anymore. Remember the good days, when the finance ministry would regularly claim that volatility is a thing of the past, and there would be no more sudden movements anymore? That would make traders book orders, etc. What better guarantor than the finance ministry, after all?
But then it would collapse again, leaving everyone with yet more burnt fingers.
And the continuous hike in the interest rate, we are once again told, is necessary to set the right market direction in face of high inflation. But where exactly is the aggregate demand that the governor held responsible for the upward drag on prices? Isn’t this inflation, as he rightly said, of the cost-push variety? Why, then, enact policy measures that are meant to contain demand-pull, full-throttle activity kind of inflation? Unless it’s an IMF requirement?
But, then again, why would the IMF want a requirement that automatically raises the volume of the debt? We go round in circles.
Also, why’s everyone so head over heals over the $6 billion? What’s that going to do? Didn’t we get much more from friendly countries? What’s so special about this $6 billion? Will it solve all problems just because this particular cheque comes from the Fund? The number is important because, as things stand, the overall foreign debt is hovering somewhere around the $100 billion mark. And, at the risk of repetition, what will this six do about the 34-40 billion due in the next couple of years?
And another thing. We’re told that the high interest rate environment, high inflation, not to mention high taxes on just about everything under the sun, means we are going to experience low growth over the next few years. Makes sense. Yet we are also told that once we’re done with the IMF program, which is three years, prices, jobs, growth, and everything else will be alright again.
Perhaps they ought to reorient their approach. It seems so far they are just concentrating on filling the revenue gap with higher taxes as far as possible. But the text book says that extreme taxation, especially in a depressed economy with consistently lower disposable incomes, further depresses economic activity and therefore revenue generation. So this particular novelty is only going to go so for.
The main problem lies with our exports. No matter what you do, if the best items on your menu are underwear and shirts, and a few mangoes and some rice, then your exports are just not going to be competitive in the international market. It’s as simple as that. That’s why no manner of help has been able to stimulate exports much. GSP plus didn’t help, bilateral treaties didn’t help, the currency depreciation certainly didn’t help, and even greater Chinese market access didn’t work out.
The reason is simple. There’s only so much more of our underwears and vests that they can accommodate. And let’s not forget that the high interest rate, high power and gas prices, and the high taxation guarantees that even these products remain incompetitive; continuously losing share to neighbouring rivals.
And rejuvenating exports means revamping manufacturing, etc, which takes a good two to three electoral cycles. That’s why it’s never figured on any political party’s manifesto. It did, very briefly, find favour with the PTI, but only as a talking point. Now that they are in charge, they are going on a very different direction as well.
So, unless the government explains some important things, it seems we will rely on loan-after-loan till somebody finally figures something out. And till we keep kicking the can down the road with the IMF and other IFIs we will not default, sure. But at what price?
