More worries for Pakistan’s exporters as Finance Minister vows to prop up local currency

Will ‘Daronomics’ as Pakistan’s Finance Minister Ishaq Dar’s policies are referred to, lead to a further dent on the country’s already battered exports sector? Dar, who assumed charge late last month outlined strengthening of the (Pakistani) rupee as one his major tasks. A close aide of PML-N supremo Nawaz Sharif, Dar is known for his interventions in the currency market in his earlier stints.

Ali Hasanain, Associate Professor of Economics at the Lahore University of Management Sciences (LUMS) in a blog published by Atlantic Council, an American think tank however opined that the currency appreciation between 2013 and 2017 led to importers and industries using imported raw materials to cater to domestic markets, and consumers going on a spending splurge as imports became cheaper. “Exporters lost competitiveness, and exports as a percentage of gross domestic product (GDP) fell more than 30 per cent,” he wrote in his blog.

While a weaker currency helps exporters by making them more competitive, imports get more expensive.

Pakistan’s policymakers have underlined the need to boost the exports sector for sustainable growth. The Pakistan Institute of Development Economics (PIDE) in a report said that exports have been a victim of protectionist tendencies which incentivize production for the domestic market rather than global markets. It highlighted the need to bring in a paradigm shift to provide incentives to industries to move their production from low value to high value products.

“An artificially propped up currency can be detrimental though it may work for a short period,” an analyst with a research firm said.

Meanwhile, Dar can boast of being able to secure an assistance of $2 billion from the World Bank for emergency operations to deal with the devastating floods but his task to bring back the country on a sustainable growth path will be fraught with challenges.

According to estimates Pakistan floods could lead to an economic loss of more than $30 billion.

“With the spotlight being on him as he replaced (former Finance Minister) Miftah Ismail as he has promised to bring down inflation while strengthening the local currency, he will be somewhat relieved but he has an uphill task given the domestic as well as geopolitical risks,” the analyst told India Narrative.

Though Ismail has managed to revive the International Monetary Fund’s bailout package, Pakistan’s macro economic indicators have worsened. To add to the problem, the IMF has laid strict preconditions that Pakistan would have to follow.

The News said that with strict conditions imposed by the IMF, Pakistan has very limited fiscal and administrative space left to exercise its discretion. “From frequent fuel price adjustments, tariff revisions, imposition of taxes and free-floating of currency to policy measures of the State Bank of Pakistan (SBP), almost all macro-economic actions are subject to IMF’s approval,” the newspaper said.

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