Manna from heaven

Anticipated surge in NFA has already led — just on expectations — to an appreciation of rupee vis-à-vis US dollar.

Despite the sceptics and doomsday soothsayers, who were forecasting an ‘economic melt-down’, surely they knew this day would come. According to my sources, Pakistan is to receive about $1.12 billion from the Coalition Support Fund (CSF) any day and another $600 million before the end of December. That, according to my calculator, is the equivalent of a cool Rs170 billion (depending on the exchange rate used). The impact of this large inflow could be uplifting and quite dramatic.

First, on the domestic side, since this is treated as ‘non-tax revenue’, conceptually correct for a change, instead of our usual games of statistical obfuscation, the fiscal deficit will fall significantly. Government borrowing will fall as well, and so will debt and market interest rates, paving the way for the State Bank of Pakistan (SBP) to cut its policy rate. Somewhere down the line — because of lags between actions and outcomes — the reduction in aggregate domestic demand pressures will cause inflation and import demand to abate.

My sceptical friends say that I am a dreamer and a bad economist. This, they say, will only “prolong the agony of the death of the economy”, as one put it. I know that. With unchanged macroeconomic policies, this inflow will also make them more reckless, arrogant and ignorant.

On the external side, this unconditional foreign exchange will stave off, for a later day, the humiliation of Pakistan having to return to the IMF again because they have, once more, mismanaged the economy and lost control. But the spectre of another ‘balance of payments crisis’, which has been talked about ad nauseam has receded.

Apart from the volume and timing of the expected inflows, other details of the deal are not known. How much are we going to charge per container? Some say zilch. The US seems to have agreed to repair infrastructure that has been damaged by these monstrous trucks. How many more billions will that bring in, even if that will be slower-moving ‘project’ aid?

The inflow on the external side will lead to a sharp rise in our net foreign assets, or NFA (or foreign exchange reserves). That may sound wonderful but it is a double-edged sword. A rise in NFA, unless ‘sterilised’, will lead to a rise in money supply, adding to the rampant and uncontrolled rise in net domestic assets, or NDA, because NDA plus NFA is, inconveniently, equal to ‘broad money’. This will, somewhere down the road, as the lags unwind, lead to upward pressure on prices.

The anticipated surge in NFA has already led — just on the basis of expectations — to an appreciation of the domestic currency vis-à-vis the US dollar with the rupee having already appreciated by 34 paisas in two days and the stock market set to soar. Whether the SBP will do anything to mute the impact of currency appreciation, I do not know, and probably, neither does the bank. But appreciation is a wonderful thing on one score. It will wipe out the speculators that have taken forward positions (bets) on further depreciation. I remember Dr Mohammad Yaqub, governor of the SBP at the time, telling prime minister Benazir Bhutto that he was going to appreciate the rupee to punish the speculators. She said, “go ahead” even if she knew that some (all?) of her party stalwarts were in the ‘business’ of exchange rate speculation and winning their ‘one-way-bets’.

Otherwise, appreciation is not something that one wants to sustain since it hurts real export profitability and makes imports cheaper — when we should be doing exactly the reverse.

The government will spend excessive money on winning elections but if they have a modicum of good sense, they will eliminate the circular debt and pay off the independent power producers in one fell swoop. The GDP growth rate should be five to six per cent or higher, depending on how the Incremental Capital-Output Ratio is impacted and, with stable and/or falling oil prices, which will shift the external terms of trade in our favour and another mysterious surge in workers’ remittances, Gross National Income growth may be seven to eight per cent!

So, good things are about to happen, with this ‘break through’ sending the doomsayers in hasty retreat. Pakistan’s economy will live to survive another day — or is it another year?

Published in The Express Tribune, July 13^th, 2012.