In terms of the economy, this belief system is described through certain actions in policy. For instance, a government-led appreciation of exchange rate, building up reserves by contracting debt and spikes in dollar-denominated debt.
In a well-functioning, open economy, foreign exchange reserves maybe considered as indicators of status and direction, but cannot be considered ends unto themselves. This article questions the conventional policy of the fetish with dollars and asks the real question: who needs the dollar?
In terms of plain economics, forex reserves are maintained to safeguard against import needs but there is an underlying interest of lenders in dollars to increase reserves i.e. debt servicing capacity.
Dollars are essentially needed to purchase goods and services from outside, thus all dollars, regardless of whether they are held by central or private banks, need to be ultimately spent on imports bills or by importers.
If importers are only private sector entities, then they assume the risk of bearing a commercial loan through an intricate system of global finance, without a state underwriting, which is all the more better. Besides loans, the commercial importers also contract short-term liabilities which are routed through letters of credit.
For Pakistan, a significant portion of US dollars is needed by importing oil but it is quickly paid back; at least by the private sector, as all by-products of oil are purchased at the consumer end in cash. It is true that our economy now features a permanent circular debt, but it is not a major part of our external liabilities. We also need dollars to import luxury items like cars but then there is a willing customer who has piled up sufficient amount of rupees to pay in dollar terms. Therefore, it should not affect our foreign currency loans significantly. Another form of dollar inflow at the private sector level is that of Foreign Direct Investment and Foreign Portfolio Investment.
In short, dollars required for private sector imports can easily be managed by open markets without necessarily involving the central bank. In my view, the role assumed by the central bank as a controlling authority on the dollars earned by the private sector is completely unnecessary. Another form of control is exhibited by using private remittance inflows as an instrument of capital account adjustments. If these controls are lifted, the flow of dollars in open market will substantially increase and not decrease as per government beliefs.
The problematic part of dollar consumption rests with the central government. It acquires it for transactions related with foreign aid, debts and liabilities. Apart from foreign aid, the debt and liabilities accrued in dollars by the government remain unlikely to be paid. These loans only get rebooked at the time of maturity and then restructured. Mostly, the government is forced to raise new dollar loans to repay instalments of previous loans. Hence the government should not have absolute authority to contract new loans.
The secret of a country’s prosperity does not lie in measuring up to dollars, but it lies with the vibrant domestic economy, something which is highlighted by the libertarian thinker, Khalil Ahmad, by his argument for highlighting prosperity that lies within Pakistan. The export-led, big push, dollar-dominated economic policy should be buried with respect. If our local economy is dynamic, we create surplus value within the private sphere to easily buy goods and services in dollars.
Following dollars religiously as a matter of policy goal is not just bad economics, it is bad religion too.
The writer is Executive Director of PRIME Institute, an independent think tank based in Islamabad
Published in The Express Tribune, December 22nd, 2014.
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