Friday, September 22, 2017

News / Event Detail
Posted on: Tuesday, December 23, 2014

During the fiscal year 2013-14 government of Pakistan amassed foreign exchange reserves from many sources: IMF, the World Bank, Consortium of International Commercial Banks, Islamic Development Bank, global financial markets, auction of 3G and 4G licenses, the gift from Saudi-Arabia, the promises for extending credit lines for import of oil, and the rising inflow of remittances to stabilize the exchange rates. In the short-run this objective was achieved and it resulted in a decline in food inflation, greater stability in international oil prices and additional borrowings for oil imports. However, economic theory tells us that the policy of maintaining excessive reserves is controversial in the long run for two reasons:  firstly, the appreciation of the currency hurts the exports which are already affected by lower productivity and higher inflation compared to the trading partners. Secondly, it is unsustainable because the increase in reserves is not based on current account surpluses.

The CPS organized a seminar on May 21, 2014 and invited  speakers well versed in the field of international trade, international finance and the economy and those representing the traders community and people related to the chambers of Commerce to explain in a simple language the euphoria of amassing foreign exchange reserves in a fragile economy like Pakistan; exactly what would be the outcome of this accounting exercise while ignoring hard core economics of the world economy; and how important is the source of foreign exchange reserves and what is their impact on the exchange rates and the current account; how the exchange  rate appreciation and other tax policies are affecting our exports  and imported inputs of the industrial and the agriculture sector.

The four speakers: Mr. Shahid H. Kardar, Vice-chancellor Beaconhouse National University, Mr. SakibSheerani, CEO      Consultants,  Mr. Shaban Khalid  , President  Islamabad Chamber of Commerce andIndustry, and  Mr. AmerIqbal. Ex- President Rawalpindi Chamber of Commerce and Industry dwelt on the policy of amassing foreign exchange reserves with no tangible backup of exports.

 The overall message of the seminar was that while short-run objective of stabilizing the exchange rate and lowering of inflation may be achieved successfully the long run scenario was bleak because the real issue was the current account deficit. It was a structural problem and arises due to increased imports of consumer goods and raw material for consumer goods industries. Unfortunately, not much has been done to resolve this issue and it has continued to be financed by the US, the World Bank, IMF and other donors in return for the use of Pakistan’s geo-strategic location. All governments and the private sector have ignored repeated callsby the experts to curtail imports of luxury goods, The speakers emphasized that this was imperative keeping in view the projections of the global economic slowdown and rising interest rates in the developed economies in early 2015. This will eventually put pressure on the rupee leading to downward adjustment. Furthermore, the experts highlighted that Pakistan was also unable to attract desired foreign direct investment due to adverse law and order situation, energy situation, continuous budget and current account deficits, reliance on traditional exports, poor skill and communications infrastructure, and low levels of technological developments.

It was concluded that incentives have not helped to increase investment, productivity and exports. It is important for the governments to realize that the exchange rates play a pivotal role in maintaininga sustainable current account surplus. A stable exchange rate requires a serious thought into controlling inflation vis-a vis the trading partners, improving overall productivity with a special focus on diversification of exports from agriculture to manufactured goods.

The seminar was well attended both by students and faculty, and the students availed the opportunity of interacting with the speakers with probing questions on the shape of economy as it stands today and what lies ahead.