Establishing Rupee-CPEC linkage

Abandoning his favorite economic prosperity mantra, the  Interior Minister Ahsan Iqbal has started a public relations campaign to conceal the bitter facts about the government’s decision to allow the rupee lose its value against the US dollar and other major world currencies. He has also given up his often repeated theme of ranking the Pakistan’s economy at 18th position among the fast growing economies of the world.

He has now started a publicity campaign to offer a lollypop that rupee will regain its lost value when the CPEC investment would do wonders. However, he admitted that 9.4 percent loss of value by rupee over the past three months by a bulging current account deficit. But he did not elaborate the reasons of $12 billion plus trade deficit with China and $ 1.54 trade deficit with Indonesia. Almost 90 percent of deficit in external balance is the direct result of personal interest motivated Free Trade Agreement (FTA) with China and Preferential Trade Agreement (PTA) with Indonesia. It will be naïve to assume that CPEC investment alone will make the rupee appreciate in value without improving the economic environment to boost productivity of the economy, reduce the cost of doing business and establish industries for producing raw material and intermediate goods for exportable commodities to make the exports competitive in the international market. Mere a generic statement does reflect the facts and it leads to wrong conclusion.

The Minister contended that a new middle class market will emerge in Pakistan as the country has achieved a growth rate of 6 percent in the gross domestic product. This allusive economic growth, calculated on expenditure method alone, hads no positive impact on the macro economic indicators which have worsened. Nor its trickle down effect has reached the common man. The ballooning current account deficit, stagnation of exports at $ 20 billion over the last four years and foreign debt of $ 90 billion amply elucidate the macro economic imbalances against which the World Bank and International Monetary Fund in their Report “South Asia Focus Fall, 2017.”But unfortunately this sane advice was despicably rejected by the same minister in August, 2017 and now the contents of the report are halfheartedly admitted. The decision of devaluation of currency was taken to seek a fresh IMF bail out loan facility to avoid the likely situation of insolvency.

The Interior Minister claimed that once CPEC project is fully functional, foreign direct investment in key areas are likely to pour in, resulting in greater opportunities for both the countries. The current technological base of civilian goods industries is not compatible with that of China. The Chairman State Engineering Corporation, in his visit to Islamabad Chambers of Commerce and Industry (ICCI), cautioned the entrepreneurs to take a quantum leap from their existing 2nd generation technology to 5th generation technology if they want to enter in joint ventures with Chinese business leaders in the Special Economic Zones (SEZs). The CPEC Center of Excellence has failed to produce even a single Research Paper how Pakistani entrepreneurs can bridge the gap between the 2nd generation and 5th generation technologies? And how Pakistani workforce will be trained to operate the 5th generation technology enabling them to avail employment opportunities in the high-tech industries to be relocated to SEZs under the CPEC frame work.? It is no longer a secret that construction work on certain road projects has been slowed down due to decline in Chinese funding and the approval of up gradation of railway main line Ml-1 from Karachi to Lahore has once again been delayed over dispute on cost estimates worked out by both China and Pakistan.

It is absolutely incorrect that CPEC was conceived by the PML-N government in 2013. In fact its spade work started in 2006 and the broad parameters of the project were finalized in the previous PPP government. It was mainly a connectivity project but the PML-N government converted it into energy project. Time will tell as to whether CEPEC loans of $ 62 billion will make the rupee appreciate in value or is weakened further. The principles of economics particularly that of monetary policy, public finance and international economics do not support the Minister’s theory that establishes linkage between the inflow of heavy interest bearing CPEC loans and rupee appreciation in value.