Why, afterall, did the Rupee fall?

A monstrous catastrophe is around the corner; the rupee is in a free fall; IMF is not ready to lend; and the Prime Minister is vying to sell whatever he can.

If you agree with all this, an anxiety pill coupled with the very basic antidote of Econ101 is in order.  Let’s try no. 2.

The rise or fall of the Rupee – or any other currency for that matter – is not subject to the whims and wishes of the policymakers, or even the Central Bank. It’s constrained by a variety of factors. As it happens on our planet, anything may be under- or over-valued in the short run, but it may be argued that in the long run, everything – every commodity, every idea, every person – converges to their ‘true’ value. This applies even to the murky world of currencies. The Rupee had to adjust to its true value ultimately and it did. It did not ‘fall’ – it was allowed to adjust, something that should have happened way earlier.

For some time now, the Rupee had been grossly overvalued. In July 14, 2007 Article IV consultation, the International Monetary Fund (IMF) pointed out the overvaluation to be around 10 to 20% with respect to the Real Effective Exchange Rate and iterated its stance in the Staff Report of March 2018. Many independent economists also raised the alarm. But the outgoing government did not want to pursue the highly unpopular policy of devaluation with the elections around the corner. And some experts backed the government’s stance on somewhat questionable grounds. They pointed out that the Rupee will result in a rise in dollar-denominated debt and increase the cost of imports which have become even more important since the China-Pakistan Economic Corridor has kicked off. Resultantly, Rupee was not allowed to take on its actual value.

The Rupee was kept ‘strong’ as the economy kept weakening. But is the strong Rupee – come what may – such a good thing? Not really.

China is one country which keeps an undervalued (weaker?) currency. Instead of fretting about a ‘weak’ currency, they revel in being the leading exporters in the world. The undervalued yuan helps this. A person in, say, the United States, will be able to buy double the amount of any product, say Chinese apples, if $1 equals 6 yuans instead of 3. This will shift the demand for apples from other countries to China.

What was happening in Pakistan was an inverted image of the above. It is easy to see why an overvalued Rupee meant lesser exports and more imports. A ‘stronger’ rupee meant imports appeared cheaper to Pakistanis. This imports-over-exports imbalance caused a run on the foreign reserves in the country. Imports were using up the foreign currency reserves and there weren’t as much exports to finance them. Resultantly, the reserves into a free fall.


When the reserves dried up, the Central Bank lost its primary tool to keep the Rupee afloat – selling foreign currency in the currency market. The State Bank could have bought Rupees in the currency market, using forex reserves, causing the Rupee to (nominally) appreciate. This is simply the result of the (artificial) increase in demand for Rupee. It’s basic economic logic that anything that is in-demand fetches a higher price, and the same is true for the Rupee.

But with the reserves dwindling, the State Bank loses lost this option as well.

Falling exports, rising imports, no foreign investment, and no reserves. This was the backdrop against which devaluation came – which in turn is the result of a long, nasty history of structural bottlenecks in the economy, power and energy crises, undiversified industrial and exports base, and misuse of central bank, among other factors.

Finally, the criticism of revaluation of the Rupee on the grounds of rise in debt and the price of imports is correct per se, but completely ignores the fact that the rate of Rupee, or any currency for that matter, is not determined in isolation, on an island, but is subject to myriads of other factors in the national and international markets. It was simply not possible.

In short, the Rupee did not ‘fall’ overnight. It had to be devalued based on the economic circumstances over the past 2 years or so. And the government deserves credit for letting the State Bank work with complete autonomy. The Rupee’s ‘weakening’, if coupled with the right policies for gaining investor confidence, will strengthen the economy. The government is yet to prove the latter.


Trump Estates of America

Mr Donald Trump, the republican hopeful in the American Presidential race, has called for a complete ‘shutdown’ on Muslims’ entry to America. Given that technologists are yet to invent a faith-detecting machine, telling Muslims from the Non-Muslims could be a challenging task.

But fortunately, for Trump there is inspiration in Daesh (ISIS). It seems to have a mechanism for distinguishing ‘other’ from the ‘own’. Once he learns that art, all Mr Trump would need to do is reverse the categories (and stop short of bombing).

Baghdadi, for his part, might have something to learn from Trump; not least, the art of being Donald Trump in an otherwise modern society.

A slightly different version of the writeup appeared in The Express Tribune, here

Whither with Aid?

‘We satiate the hungry, we heal the dying. We are the ones who shield the weak’. It plagues us and it plagues us deep. The deleterious complacence that we work hard to sustain them; we sweat and bleed – the blue elixir – that earthlings in the poorer half of the world live on. We – the development enthusiasts – are a bunch of cocksure men who presume that their exalted profession excepts them from all kinds of answerability. The sensitivity of our profession though is such that we infect when we err and kill when we blunder.

Disturbed by an unnerving dream, or supplied with some super-classified evidence, the interior minister woke up to declare Pakistan off limits to the famous NGO, Save the Children. It was banned. It was unbanned; as the nation saw Islamabad in awe. What was happening out there? Nobody knew; it was a tragic comedy of sorts.

Nevertheless, we – the development community – hardly had the moral high ground to stand tall the way we did. We did not care to probe the matter at our own end? No. We launched into a chastening campaign against the government, and such highhandedness plagues us deep – in Bangladesh, in Cambodia, in Pakistan!

Our liberal approach to self-evaluation has left us vulnerable to all kinds of threats from the inside and out. We know our management of aid is far from enviable. The sheer spread of our private donors around the globe makes following the trail of their feel-good donations impossible for them. Naturally, they tend to sit back and relax with a light conscience heaping us with loads of trust. What do we do in turn? We mark our achievements and sweep our shortcomings under the carpet. The Haiti earthquake episode, where the American Red Cross was merely able to build 6 homes after having raised half a billion dollars is one unfortunate example.

Analysing the effectiveness of aid is further complicated by the difficulty of accounting for the ‘true cost’ of providing services a particular NGO is providing. That is, does the accounting cost reflect the true, competitive price for a similar service in the open market? Indirect costs eat away a substantial part of aid money and answering such questions can be very challenging without candid data dissemination by NGOs.

Yet a graver threat to Development, which makes even our alarming weaknesses seem rather trivial, is how the donor countries dress their obscene political interests in majestic altruistic garbs. There is no dearth of literature documenting the American influence on the World Bank and its International Development Agency’s lending. On a bilateral level, the case of sudden drop in the US aid to Pakistan as soon as the Soviet War ended and its resumption as soon as the so-called War on Terror began make textbook examples of how international aid can be politically motivated.

US aid to Pakistan CGD

US Aid to Pakistan over the years Source: http://www.cgdev.org/page/aid-pakistan-numbers

But there is still an even viler case of the deployment of international aid to achieve political ends: the use of NGOs for ‘promoting democracy’ and even ‘information-sharing’, which to some are euphemisms for intelligence operations and spying. Emad Mekay, of the Investigative Reporting Program at UC, Berkeley traced the stream of funding for anti-Morsi activism back to American sources. These NGOs were mostly working for ‘promoting democracy.’ Ironically, their efforts resulted in a coup that ousted the freely elected president (sentenced to death later) and installed a military commander, General Sisi, in his place.

Similarly, this document on the CIA website gives an interesting account of how INGOs provide crucial information in conflict zones and the potential that lies in such cooperation. Unsurprisingly, these proposals come from a former head of the American National Intelligence Council, preoccupied with security and lacking a deeper understanding of humanitarian values and the caution that such noble missions have to go with. Save the Children has been classified by the writer as being in the group of NGOs that “have contact with foreign governments as needed for security and practical reasons…”

Of course, that does not provide even a pinch of proof to hold Save the Children responsible for its allegedly controversial activities. Save the Children is an organisation par-excellence as far as its effectiveness and transparency are concerned. But the point to be taken here is that the engagement of an NGO with donor governments risks profound defamation of development work. Its stigmatisation – even if ungrounded – casts a shadow over the genuineness of the whole development enterprise, evoking an unneeded paranoia in the private donors and recipients alike. The government’s crackdown on NGOs is a classic example of how worse things can get. On back of Save the Children comes the threat to revoke the license of the esteemed British Council.

Who is responsible for this mess? The government? Yes. But no more than we ourselves. We the development workers need to campaign for making the development work transparent and free from political influence in all hues. For that, a good starting point is drawing a blueprint for an autonomous, apolitical, international development organisation that pools all aid from public as well as the private sources and allocates it to the best-managed NGOs for the most urgent projects. All direct donations to developing countries from the rich ones, with that lofty label of ‘development’, should be barred officially. Until the formation of such a regulator, or at least credible steps in that direction, it will be only natural for NGOs to keep facing bizarre pressures – sometimes from the donor countries and sometimes from the recipients.

(Access this at The Express Tribune blogs here)


Of rails, roads and Metronomics

The Metro bus project in Lahore has been an indisputable success. Yet the successful working of a bus service is not a very good yardstick for measuring the optimal use of tax-payer’s money. The chief minister would do good to consider whether other projects, in other areas of Punjab, could produce higher returns in terms of economic efficiency, equity and/or environment, before initiating yet another transportation project for Lahore. More than anything, the final approval for any project should come after a thorough economic appraisal instead of guesswork.


A (somewhat provocative?) Tribune summary of the piece

Read the full post here on Express Tribune Blogs

How I see Zarb-e-Azb

This writer put into words what I was not being able to even systematically think. I have tried to support the operation, Zarb-e-Azb, but my feelings have been all over the place. It is our war – against our people. But then, there are times when you have to amputate your limbs away. No matter how much we hate the doctor or his surgical kit, wisdom lies in lending all our support to him.

Even so, if the infection was an outcome of poor hygiene practices in the hospital, misdiagnosis of the doctor, or negligence of the nurse, in the first place, there is no reason why I should not be disturbed; no reason why my heart should not bleed in pain over a tragedy that could have been avoided.

Earning the auspices and support of a major player in global politics, such as the US or Russia or China, is understandable. But lending military support through proxies is a big big step. This we did when the Soviets came to Afghanistan.

Then, after 2 decades or so, a dictator got up one otherwise fine morning and told our proxies, “We need your lot back. The cause you were fighting for is a cause no more.” The following day, it was declared that we were lending logistic support and even our airbases to US – hellbent upon wiping out any signs of life from (at least parts of) the land. All we told our men was, “We told you!”

Yet perhaps the unforgivable mistake of our (erstwhile proxy) men was terrorising and targeting civilians after US invasion – who had neither to do with their creation in the first place, nor their abandonment later.

The military is probably avenging that.

We are with our soldiers with all our heart – though our suffering runs deep!

(The News International, Newspost, ‘Our people, our war, our suffering‘, June 19)

Is our growth inclusive?

The projection of economic growth as something evil that benefits only the rich is mistaken. But equally fallacious is taking the GDP number for a sacrosanct symbol of sure-fire prosperity for all. All praise is due to the government’s economic team for various improvements in the macro-economy: 5% growth in first quarter, about 10% appreciation in the Rupee within 3 months, and excellent performance of the stock market – all reflect recovery. Yet how these gains are shared with the neediest of the needy remains to be seen – and only this should be taken as an encompassing yardstick of success.

Historically, Pakistan’s economic policy has never been pro-poor. In the words of Stephan Klasen, ‘Pro-poor growth will require growth that is focused on sectors where poor people are active (or could become active) and regions where poor people live…’ Leaving Zulfiqar Ali Bhutto’s 70s aside (who launched into an over-charged, rather self-defeating assault on poverty) poverty reduction was no government’s priority. Admittedly, PPP-governments were relatively more focused in this respect, but their lacklustre economic performance and unimpressive governance hit the poor from another window, namely, overall stagnation of incomes.

Yet our amoral approach to economics has hardly changed. The present government is living up to the impression it is known for – being industrialists’ government. According to a State Bank’s report, industry and services grew by 0.7 and 1.2 percentage points more than their respective targets in Q1 FY2014. But the agriculture sector missed its target by 1.3 percentage points and its growth was 0.2 percentage points less than even the corresponding quarter last year.

Was this apparent industrial bias simply an irregularity? Not really. This season – after the first quarter – farmers got the squeeze from sugar mills, where the official price for sugarcane was perceived as being unfairly low – same as last year. In addition, the sugar mills also made deductions of around 1000kg per trolley on pretext of poor quality cane – which farmers find indeed a novel way to pay less for their cane. Hardly was any farmer exception to this general rule of katoti or deduction, since the cane was abundant and the buyer monosponic. The sugar industry – as always – was allowed to act as the single buyer. The wheat support price, which was the farmers’ last hope for compensation this year was also not revised. While the previous government had been revising the prices upwards every year, this government came with a sharp change of policy.


This echoes a recurring shortcoming in the South Asian approach to economic development where agriculture and industrialisation were treated as if they were mutually exclusive. Growth in India, to state another example, did not ameliorate the state of farmers the way Chinese growth did, where growth and poverty reduction both were rapid.

East Asian countries, like Japan, South Korea, and Taiwan engaged in aggressive export-oriented industrialisation, but with an equally high-spirited redistribution of resources. Agricultural policy complemented the industrial policy. Agrarian reforms included fair and stable prices, subsidised credit and technical assistance from the government, and redistributive and tenurial land reforms. These measures ensured better deal for the farmers and steady growth of agriculture.

For the industry, in turn, the agrarian reforms secured a smooth supply of economical raw materials, but also a bigger domestic market for industrial products. As new buyers, who had graduated out of poverty, kept becoming part of the markets for comforts and luxuries, domestic demand for the manufactures increased. The resulting win/win situation, had other spillover effects as in better health and education.

There is no reason why this pattern of inter-sectoral complementarities cannot be emulated in Pakistan. Agriculture employs 45 per cent of the total labour force here. The rampant poverty which is especially concentrated in the rural areas makes the case for such pro-poor growth even stronger.

The recent multidimensional poverty report by Naveed and Ali (2012) reveals about a 3rd of Pakistan’s population remains poor, 21 per cent being under severe stress. But, ‘severe poverty in rural population is 4 times higher than in urban population’. In addition, while only 18 per cent of urban households are poor, 46 per cent rural ones live in poverty.

The policymakers need to strike a balance between the interests of the bottom 20% and the top 20. To think that supporting the rich industrialist class would bring growth on its own is an illusion that has failed us miserably in the past 66 years. Growth cannot be sustained with crime and violence. Crime and violence will be there as long as there is poverty. Agriculture is the golden goose that can eat away the poverty bug and keep laying the gold eggs of industrial growth. Nurture the golden goose, don’t kill her, my dear industrialist!

(The Express Tribune Blogs (version I) and PakistanKaKhudaHafiz.com Opinions (version II))

Shady Business

When Ishaq Dar took charge of the country’s finances, people were happy to see a home-grown finance minister. The business class was excited to see a business tycoon assuming premiership. The 2013/14 budget disappointed many, but made the business community happy – and the KSE expressed this exuberance.

Worryingly, that optimism is now dwindling. Right from the start, the government seemed determined at targeting a domestically-financed recovery. This is reflected in lowering corporate tax rate, slashing policy rate, increment of the center’s share of developmental expenditure, and lately, the pace of government borrowing. But the recently announced investment policy to turn black money white speaks of the frustration this ambitious policy-mix has met – as per your editorial, ‘Amnesty scheme’ (Dec 4). The supposedly well-meaning but resource-starved government seems ready to go to all extents.

Shady business will not help the already struggling image of the country. It is recommended that foreign assistance from any sources be arranged on an immediate basis. This would help restore international investors’ confidence. At home, serious economic policies need to be pursued instead of desperate economic schemes, tax amnesties, and maniacal unplanned seigniorage.

(Newspost, The News International – December 08, 2013)

IMF’s happy, but the government needs to plan ahead

That the Fund facility is on track is not that merry a news. Economists tell us that the government is taking the right steps. Yet, it cannot be lulled by the recent note of satisfaction issued by its benefactor. Why so?

IMF lures the bad boys of the world economy into one of its programmes and encourages them to behave. Both live through mutual dependence, just like banks and the greedy. One needs to lend money the other one is coveting for. Yet, if the contract goes ‘off-track’, the deal stands suspended. And remember who we are talking about? IMF and the bad boys.

Out of the paper, into the real world, things are not that simple. IMF needs to appreciate its role in making a programme successful. In only 7 out of 20 IMF-programmes in Pakistan could the pre-agreed amount be drawn. Most of these were suspended before completion. Needless to say, the absence of political will of the ruling parties resulted in poor success rate.

Yet from an institutional perspective, the IMF’s irresponsible lending in the first place, followed by its inability to make the governments accountable at earlier stages of the programme is a compelling explanation. In 1994-97 period alone, Pakistan government entered 6 IMF-programmes: 2 Programmes every year. All failed. But the IMF was generous enough to keep lending for one after another.

This brings us to an inherent problem IMF-designed adjustment programmes. For the Fund, the incentive to term a programme ‘off-track’ is least in the beginning, as early derailment would reflect irresponsible lending. The result is poor programme compliance goes unpunished initially, only to strike back later when the programme is altogether suspended.

How impeccable is the design of the on-going IMF-programme and how much pressure the IMF is putting on the government to pursue the ‘right’ policies remains beyond the eyeshot of common man. But the signs are mixed. For one, it seems too cheery for the Fund to issue note of satisfaction with foreign reserves crippling, rupee depreciating, & foreign portfolio investment falling. One may surmise that the medium-term outlook of the Pakistani economy must be encouraging, and that must be the basis for IMF’s optimism. But it is not. On the contrary, the IMF has revised its forecasts for GDP growth and the current account downwards, for Pakistan as well as globally.

Lastly, it cannot be overemphasised that the government is being a little too optimistic in expecting mere fiscal consolidation to get the wheel of the economy rolling. Appease Taliban or launch a full-fledged assault, it does not matter to investors. What does is a clear vision and an articulated strategy to create a supportive, safe, and thriving business environment over the years, where property rights and contracts would be enforced. If the government keeps delaying critical decisions in the political arena, all we get at the end of an even ‘successful’ IMF programme will be another mountain of debt.

(An earlier version of this post appeared in the daily Dawn)

Access denied, but why?

In a recent article published in Dawn, Chris Lockyear of Doctors without Borders expresses concern over not being allowed access to quake-hit areas. He is right in arguing that the National Disaster Management Authority (NDMA) or the military may not be as good at handling such emergencies as Médecins Sans Frontières (MSF), especially when it comes down to health-related issues. However, in order to understand Pakistani government’s view, the on-ground situation and the threats to MSF personnel need to be appreciated.

As he has mentioned, the MSF needs “to be guaranteed a basic level of safety before going in.” This – in a stronghold of insurgents – is simply not possible. The security situation in Awaran is not comparable to that in Kashmir or even Ziarat. Army has itself been targeted there. The chief minister’s helicopter was attacked with rockets. If safety could have been ensured, Army personnel would have ensured it for themselves and for other CM already.

Besides, it is highly unlikely that militants concern themselves with debates regarding MSF’s impartiality. They would rather view them as lucrative targets for gaining international attention.

In the given situation, perhaps it would be best for the MSF to help the government with its technical expertise, training and other resources from the back end. For its part, the Pakistani government should pave the way for that.

Are Imran Khan’s peace efforts misplaced?

(Access the shorter version here in The News)

Recently, Imran Khan proposed the government to allow the Pakistani Taliban (TTP) to open an office like the Afghan Taliban’s in Qatar. Moreover, to pave the road for smooth negotiations, he suggested that the government should immediately declare a ceasefire. Needless to say, these were big statements to make. However, the way he was assailed by analysts was, at least, equally questionable. Those who disagreed with Mr Khan have been at a loss at suggesting any alternative strategies to counter the menace.

For one thing, we – the Pakistanis – are not having a very merry time anyway. The security forces have been on the offensive for about a decade now but the security situation has only worsened. Though, the forces have been diligently working to bring about peace but the desired results have not shown despite elimination of many key figures from Talibans’ ranks and apparently triumphant battles in different places.

Whether the Pakistani government authorises the forces to launch a new offensive or proceeds with the negotiations, either way it is quite uncertain as to which way the balance will swing. Instability may continue with negotiations – but the same applies to war as well. Alternatively, a new all-out offensive can culminate in lasting peace. But so can winning even a few of the main TTP factions to your side through negotiations. In short, there are no clear and easy answers.

Had progress been showing up in the prevailing war, Imran Khan’s emphasis on talks could have been reasonably questioned. But in the current circumstances, giving peace a chance seems like the only viable option. Differences about the timing, scope, frame and nature of talks should not bar negotiations from proceeding.

The war option will, anyway, remain.