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Change in FDI Norms

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Authors: Navya Bhandari and Ayush Mehta*

Recently, Donald Trump was heard accusing China of “spreading” the Novel Coronavirus. Of late, there are sources which show that China initially hid information about the virus, which strengthen the claim that it’s a Chinese virus. COVID-19 has changed all dimensions of business, making it all the more uncertain. With crashing markets, stagnant growth, and job layoffs, the global economy is hard hit. Among such business uncertainties, it seems that China has emerged as the winner. The strength of this statement lies at the fact that while nations all over the world are at an all-time low, the Chinese economy has started to recover and so much that 96.6% of China’s large and medium sized firms have resumed operation.

In such a scenario, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, with a view to curb “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic,” took a strong step and recently amended paragraph 3.1.1of the Consolidated FDI Policy, 2017. This article analyzes the said change in law and its repercussions thereof.

What strained the government to take this step?

On 12th April, the Chinese Central Bank increased its stake in HDFC bank by 1%. This led to widespread uproar among the Indian investors and public, and the Indian government was driven to the realization that Chinese firms may take advantage of India’s fragile economic condition and undertake similar actions. Taking hands on approach, the government, forced by the fears of hostile takeovers, decided to change the existing norms related to Foreign Direct Investments to protect investor interest.

Since a lot of sectors in India are open to 100% foreign investment, it compelled the government to act preemptively. Though the change has been made for investments from all land neighbours of India, it mainly hints at hijacks by Chinese firms.

Changes in the Legal Position Regarding FDI Norms

The government via a Press Note, introduced strategic changes in the FDI policy to curb takeovers and acquisitions of Indian companies in light of the falling stock prices on account of the COVID – 19 pandemic. However, this amendment in norms, though in action, is yet to be confirmed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Non-Debt Instruments Rules, 2019 (Non-Debt Rules) which govern foreign investments in India. It is pertinent to note that under the FEMA Rules, 2019, only RBI has been vested with the power to make regulations. Therefore, because the aforesaid notification was given out by the Ministry of Commerce, it is yet to be confirmed by the RBI.

FDI Policy in India

As per the FDI Policy in India, foreign investments can be done via two routes:

  1. Automatic route – Under the automatic route, the threshold for investments has been capped as per different sectors and it can be done without prior government approval.
  2. Government route – Under the government route for foreign investment, governmental approval is required.

Non-resident entities can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Similar restrictions are also placed on Pakistani entities and individuals.

Revised Policy

The revised policy is designed taking cue from other European nations like France, Italy and the United Kingdom. Under the revised policy the government has narrowed the scope of investment, by placing it under strict governmental scrutiny in order to protect Indian interests.

Under Para 3.1.1 (a), “A non-resident entity can invest in India, subject to the FDI Policy, except in those sectors which are prohibited.” The change in the policy now brings investment from all those countries which share land borders with India or where the beneficial owner of an investment is situated in any such country or is a resident, under the government route.

 Government approval is required not just for the future investments but also for the transfer of ownership of existing FDIs.

Paragraph 3.1.1 (b) reads, “In event of transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, which results in beneficial ownership falling within the restriction of clause (a), such subsequent change shall also require prior government approval.

Additionally, the use of the word ‘or’ between ‘directly’ and ‘indirectly’ in the norm makes the amendment inclusive and covers all modes through which any investment may be made.

While this decision will help India monitor hostile and opportunistic takeover of Indian companies, the fear of such takeovers is not just from neighbouring countries but from the world at large. The change in policy, which is narrowly focused on China, still leaves room for such actions from other parts of the world, though they are highly unlikely. 

Analysis of the Amendment – Is it foolproof?

It is pertinent that the above changes have been made to FDI, and not to Foreign Portfolio Investment (FPI). To the contrary, the recent HDFC bank stake increase was made through the FPI route.

In October, 2019, the Securities and Exchange Board of India (SEBI), had reclassified FDI and FPI with a view to widen the scope of regulation. The new rules state that any investment below 10% stake through any route will be classified as FPI. This means, even direct investments below 10% stake will be classified as FPI, thus escaping the change in paragraph 3.1.1, which is only for FDI.

Moreover, there are certain aspects in which the norms are unsettled. The norms do not define what “beneficial ownership” means. Neither is the term defined in the FEMA or the Companies Act, 2013. Adding on, the regulation does not list the countries in particular. This leads to ambiguity regarding the fact that, whether investments from Hong-Kong will be treated differently or same as the investments from mainland China. Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 treat the two differently.

After the dissolution of the Foreign Investment Promotion Board, it is also unclear as to who will be responsible for granting the required permission for foreign investments.

Impact of the amendment on the economy

These pre-emptive changes have been made to take care of round – tripping of investment. However, there will be other significant impacts of the decision, especially on startups.

While the move to prevent China from taking advantage of the economic predicament is welcomed, it may have far-reaching implications on Indian startups, for whom Chinese investment has been paramount. Chinese investment is the stimulus for the impressive growth of Indian startups and of late Chinese venture capital funds and giants like Alibaba and Tencent have ramped up their investment in this sector to an extent that without their investment the future of Indian startups looks bleak. Currently at least 18/23 Indian unicorns, such as Paytm, Snapdeal, OYO, Ola are backed by Chinese investors.

The notification can be an impediment to growth. The new policy would force companies who depend on investments from China, to find new investors in this time when there would be none. The flow of capital from Europe and the US would also dry up due to their own economies heading towards a recession. The change in policy will not only affect the growth-stage startups but also unicorns who depend on such investment to keep the cash flowing.

While we agree that some measures are necessary to prevent India’s advantage being taken, a sectoral implementation of the policy would have been better. Given the plight of the Start-up industry in India, a liberal approach for this sector of the economy would have been more beneficial.

The restriction on investments will also impact the Make in India plan, as it had been luring Chinese manufacturers to set their units in the country and reducing imports to reduce the balance of trade deficit. However, as there are no exemptions mandated by the government in this regulation, it could very well dampen such initiatives.

China and WTO: The new conundrum

A Chinese spokesperson claimed that the barriers India has set, violate WTO’s principles of non-discrimination and are in contravention with the general trend of liberalization and facilitation of trade and investment.

However, China’s claims can be refuted by the fact that there is no denial of permission to invest, rather a change in the approval process. The policy does not result in any restriction of Chinese investment and hence cannot be considered as an impediment to facilitation of trade.

Way Ahead: Suggestions and Conclusion

It is the government’s duty to take every possible step to protect the interest of Indian companies. While the prompt actions of the Indian government are appreciated, it is expected that another notification by the government clears the ambiguity in relation to the list of countries, who a beneficial owner is and specifying the authority for granting permissions.

Another aspect that has to be taken care of is the booming startup industry in India, which is heavily dependent on Chinese firms for funding. In the already collapsing economy, smaller startups who are not financially strong need more capital injection to stay afloat. Whilst altering rules for FDI and FPI, the government should lay a clear roadmap and provide some relief or alternate measures.

The government should also consider excluding sectors which have prospects to create a huge number of jobs and companies with existing 100% Chinese ownership. An exemption of investments by ‘pooled companies,’ in which Chinese companies do not have controlling capacities would also be beneficial.

India being an attractive investment destination for Chinese investors, is vulnerable to hostile takeovers at this point. Therefore, although this decision hinders and is an impediment for all such investments, it surely will go a long way to protect hostile takeovers. In toto, the regulation is a welcomed move.

*Navya Bhandari and Ayush Mehta are pursuing 5 year law from National Law Universiry Jodhpur. 

Economy

Russia, China and EU are pushing towards de-dollarization: Will India follow?

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Authors: Divyanshu Jindal and Mahek Bhanu Marwaha*

The USD (United States Dollar) has been the world’s dominant currency since the conclusion of the second world war. Dollar has also been the most sought reserve currency for decades, which means it is held by central banks across the globe in significant quantities. Dollar is also primarily used in cross-border transactions by nations and businesses. Without a doubt, US dollar’s dominance is a major reason for the US’ influence over public and private entities operating around the world. This unique position not only makes US the leader in the financial and monetary system, but also provides incomparable leverage when it comes to coercive ability to shape decisions taken by governments, businesses, and institutions.

However, this dynamic is undergoing gradual and visible changes with the emergence of China, slowdown in the US economy, European Union’s independent policy assertion, Russia-US detachment, and increasing voices from across the world to create a polycentric world and financial system in which hegemonic capacities can be muted. The world is witnessing de-dollarisation attempts and ambitions, as well as the rise of digital or cryptocurrencies at an increasing pace today.

With Russia, China and EU leading the way in the process of de-dollarisation, it needs to be argued whether India, currently among the most dollarized countries (in invoicing), will take cue from the global trends and push towards de-dollarisation as well.

Why de-dollarisation?

The dominant role of dollar in the global economy provides US disproportionate amount of influence over other economies. As international trade needs a payment and financial system to take place, any nation in position to dictate the terms and policies over these systems can create disturbances in trade between other players in the system. This is how imposition of sanctions work in theory.  

The US has for long used imposition of sanctions as a tool to achieve foreign policy and goals, which entails restricting access to US-led services in payment and financial transaction processing domains.

In recent years, several nations have started opposing the unilateral decisions taken by the US, a trend which accelerated under the former president Donald Trump’s tenure. He withdrew US from the JCPOA deal between Iran and US, aimed at Iran’s compliance with nuclear discipline and non-proliferation. Albeit US withdrawal, other signatories like EU, Russia, and China expressed discontent towards the unilateral stance by the US and stayed committed towards the deal and have desired for continued engagements with Iran in trade and aid.

Similarly, the sanctions imposed on Russia in the aftermath of the Crimean conflict in 2014 did not find the reverberations among allies to the extent that US had wanted. While EU members had switched to INSTEX (Instrument in Support of Trade Exchanges) which acts as a special-purpose vehicle to facilitate non-USD trade with Iran to avoid US sanctions, EU nations like Germany continue to have deep trade ties with Russia, and  EU remains the largest investor as well the biggest trade partner for Russia, with trade taking place in euros, instead of dollars.

Further, despite the close US-EU relations, EU has started its own de-dollarization push. This became more explicit when earlier this year, EU announced plans to prioritize the euro as an international and reserved currency, in direct competition with dollar.

Trajectories of Russia, China, and EU’s de-dollarisation push

Russia has emerged as the nation with the most vigorous policies oriented towards de-dollarization. In 2019, the then Russian Prime Minister Dmitry Medvedev had invited Russia’s partners to cooperate towards a mechanism for switching to use of national currencies when it comes to transactions between the countries of the Shanghai Cooperation Organization (SCO). It must be noted that in Eurasian Economic Union (EAEU), which functions as a Russian-led trade bloc, more than 70 percent of the settlements are happening in national currencies. Further, in recent years, Russia has also switched to settlements in national currencies with India (for arms contracts) and the two traditionally strong defence partners are aiming at exploring technology as means for payment in national currencies.

Russia’s push to detach itself from the US currency can also be seen in the transforming nature of Russia’s foreign exchange reserves where Russia for the first time had more gold reserves than dollars according to the 2018 data (22 percent dollars, 23 percent gold, 33 percent Euros, 12 percent Yuan). As per the statement by Russian Finance Minister in 2021, Russia aims to hold 40 percent euro, 30 percent yuan, 20 percent gold and 5 percent each of Japanese yen and British pound. In comparison, China holds a significant amount of dollar denominated assets as forex reserves (50 to 60 percent) and has the US as its top export market with which trade takes place mostly in US dollars. Moreover, Russia has also led the push by creating its own financial messaging system- SPFS (The System for Transfer of Financial Messages) and a new national electronic payment system – Mir, which has witnessed an exponential rise in its use.

While China-Russia trade significantly depends on euros instead of  their own national currencies (even though use of national currencies is slowly rising), instead of pushing the Chinese national currency Renminbi (RMB), Beijing is aiming towards establishing itself as the first nation to issue a sovereign digital currency, which would help China to engage in cross border payments without depending on the US financial systems. Thus, for China, digital currency seems to be the route towards countering the dollar dominance as well as to increase its own clout by leading the way for an alternate global financial system operating in digital currencies. It needs to be noted here that EU has succeeded in internationalizing the euro and this can be seen in the fact that EU-Russia trade as well as Russia-China trade occurs predominately in euros now.

Will India follow suit?

Indian economy’s dynamic with dollar is different than other major economies in the world today. Unlike China or Russia (or EU and Japan), which hold dollars in significant amounts, India’s reserve is not resulted by an export surplus. While others accumulate dollars from their earnings of trade surplus, India maintains a large forex reserve even though India imports less than it exports. In India’s case, the dollar reserves come through infusion of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), which reflects the confidence of foreign investors in India’s growth prospects. However, accumulation of dollar reserves through this route (which helps in offsetting the current deficit faced in trade), India remains vulnerable to policy changes by other nations’ monetary policies which are beyond India’s own control. For instance, it has been often highlighted that a tightening of the US monetary policy leads to capital outflows (capital flight) from India, thus impacting India adversely.

New Dehi has resisted a de-dollarization push for long. Back in 2009, when Russia and China had started the push via BRIC mechanism (Brazil, Russia, India, China grouping), it was argued that New Delhi would not like to upset Washington, especially after the historic US-India civil nuclear agreement was signed just a year before in 2008 -for full civil nuclear cooperation between the two nations.

Further, currency convertibility is an important part of global commerce as it opens trade with other countries and allows a government to pay for goods and services in a currency that may not be the buyer’s own. Non-convertible currency creates difficulties for participating in international market as the transactions take longer routes for processing (which in case of dollar transactions, is controlled by US systems).

 Just like Chinese renminbi, Indian rupee is also not yet fully convertible at the exchange markets. While this means that India can control its burden of foreign debt, and inflow of capital for investment purposes in its economy, it also means an uneasy access to capital, less liquidity in financial market, and less business opportunities.

It can be argued that just like the case of China and Russia, India can also look towards having a digital currency in the near future, and some signs for this are already visible. India can also look towards having an increased share of euros and gold in its foreign exchange reserves, a method currently being used by both China and Russia.  

Conclusion

An increasing number of voices are today pointing towards the arrival of the Asian age (or century). With China now being the leading economic power in the world, US economy on a slowdown, and emergence of an increasing polycentric structure in world economy, the dominance of dollar is bound to witness a shake-up. In order for global systems to remain in sync with the transforming economic order, structural changes like control over leading economic organisations (like IMF and World Bank) will become increasingly desirable.

With an increasing number of nations now looking towards digital currencies and considering a change in the mix of their foreign exchange reserves, a general trend is now visible even if it would not mean an end to dollar’s dominance in the immediate future. As the oil and gas trade in international markets also start shifting from dollar, geopolitical balance of power is expected to witness a shift after decades of US dominance.

Major geopolitical players like China, Russia and EU have already started their journey to counter the dominance of dollar, and the strings of US influence on political decisions that come with it. According to Chinese media, Afghanistan’s reconstruction after US-withdrawal can also accelerate the global de-dollarization push as nations like Saudi Arabia might look for establishing funds for assisting Afghanistan in non-dollar currencies. So, conflict areas highlight another avenue where de-dollarization push will find a testing arena in coming times.

India has several options for initiating its de-dollarization process. Starting from Russia-India transactions, trade with Iran, EAEU, BRICS and SCO members in national or digital currencies can also become a reality in near future. Considering India’s present dollar dependence, whether US sees India’s move towards de-dollarisation as a direct challenge to US-India relations, or accepts it as a shift in the global realities, has to be seen.  

*Mahek Bhanu Marwaha is a master’s student in Diplomacy, Law and Business program at the OP Jindal Global University, India. Her research interests revolve around Indian and Chinese foreign policies and trade relations.

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Economy

Today’s World Demands Sustainability

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In the Brundtland Report, the United Nations defined sustainable development as development that satisfies current demands without jeopardising future generations’ ability to meet their own. It is based on the assumption that resources are finite and should be used sparingly and wisely to guarantee that there is enough for future generations without lowering current living standards. A socially responsible society must prioritise environmental conservation and dynamic equilibrium in human and natural systems.

Pillars of Sustainability

Environmental, social, and economic pillars make up the concept of sustainability, which is sometimes known as profits, planet, and people informally. These are especially important in terms of corporate sustainability and company activities.

The most frequently discussed aspect is environmental protection. As part of a supply chain, it is concerned with reducing carbon footprints, water usage, non-decomposable packaging, and wasteful operations. These procedures can be both cost-effective and beneficial to the bottom line, as well as crucial for environmental sustainability.

Social development entails treating people fairly and ensuring that employees, stakeholders, and the society in which a business operates are treated responsibly, ethically, and sustainably. More responsive benefits, such as greater maternity and paternity benefits, flexible scheduling, and learning and development opportunities, could help achieve this. Businesses should, for example, utilise sustainable labour, which entails adequately compensated, mature employees who can work in a safe atmosphere.

Economic development is probably the most straightforward type of long-term sustainability. A firm must be successful and generate enough money to be economically sustainable in the long run. The difficulty with this type of sustainability is finding a balance. Rather than producing money at any cost, businesses should try to make money in a way that is consistent with other aspects of sustainability.

What can be done to quantify it?

The performance of the three basic principles as a whole, in particular a balanced treatment of all three, is used to assess sustainability. Although the Triple Bottom Line’s three core concepts do not provide a measurement methodology in and of themselves, subsequent approaches of assessing sustainability have attempted to do so. Despite the fact that there is no official universal assessment of sustainability, several organisations are developing industry-specific methods and techniques to assess how social, environmental, and economic principles operate within a corporation.

What Impact Does Sustainability Have on Business?

Sustainability is becoming increasingly crucial for all businesses, regardless of industry. A sustainability strategy is considered necessary by 62 percent of executives today, and another 22 percent believe it will be in the future.

Simply expressed, sustainability is a business strategy for generating long-term value by considering how a company works in its environmental, social, and economic contexts. The concept behind sustainability is that establishing such measures promotes firm lifespan. Companies are realising the need to act on sustainability as expectations for corporate responsibility rise and transparency becomes more widespread.

Executives today face a complex and unprecedented confluence of social, environmental, market, and technology forces. This necessitates comprehensive, long-term management. Executives, on the other hand, are frequently hesitant to make sustainability a priority in their company’s business plan, mistakenly believing that the costs exceed the advantages. Academic research and corporate experience, on the other hand, suggest the exact reverse.

Traditional business strategies prioritise shareholder value creation at the expense of other stakeholders. Sustainable companies are changing the corporate ecosystem by creating models that benefit all stakeholders, including employees, shareholders, supplier chains, civil society, and the environment. The concept of “creating shared value” was pioneered by Michel Porter and Mark Kramer, who argued that firms might generate economic value by recognising and addressing social issues that connect with their business. Much of the strategic value of sustainability stems from the requirement to communicate with and learn from important stakeholders on a regular basis. A corporation with a sustainability agenda is better positioned to foresee and react to economic, social, environmental, and regulatory changes as they happen through regular discussion with stakeholders and continuous iteration.

Moreover, Businesses can benefit from the Triple Bottom Line approach to running a firm in a variety of ways. Meeting UN environmental sustainability requirements is not only ethical and necessary, but it is also cost-effective and enables for a better business model. Furthermore, sustainability allows a company to recruit employees, owners, and consumers who are invested in and share the same values as the company’s sustainability aims. As a result, the impact of sustainability on a company’s reputation and income can be favourable

Why is Sustainability Important for Students

Sustainability is a comprehensive field that provides students and graduates with knowledge of almost every element of human life, from business to technology to the environment and social sciences. The essential skills with which a graduate leaves college or university are in high demand, especially in a modern society seeking to substantially reduce carbon emissions while also discovering and developing future technologies. Politics, economics, philosophy, and other social sciences, as well as the hard sciences, are all used to support sustainability.

As firms seek to comply with new legislation, many corporate occupations at the graduate level and above prioritise sustainability skills and environmental awareness. As a result, sustainability graduates will work in a variety of sectors, including civic planning, environmental consulting (both built and natural environments), agribusiness, non-profit management, corporate strategy, health evaluation and planning, and even law and decision-making. Entry-level occupations are on the rise, and bachelor’s grads may expect more options and opportunities in the future years. Sustainability is one of the newest degree programmes, attempting to combine social science, civic engineering, and environmental science with future technology. When we hear the phrase “sustainability,” we usually think of renewable energy sources, carbon reduction, environmental protection, and a strategy to keep our planet’s delicate ecosystems in check. In a nutshell, sustainability aims to safeguard our natural environment, human and ecological health, while also encouraging innovation and ensuring that our way of life is not jeopardised

Even if you aren’t studying environmental science, sustainability is an important topic to learn about. Sustainability is important for business majors to understand since it helps with customer appeal and Corporate Social Responsibility. Students studying agriculture, nutrition, and public health should concentrate on sustainability to understand how to feed a growing population nutritious and high-quality food. Majors in education pass on their knowledge of sustainability to the next generation, preparing them to lead change. Every major has a link to the environment

The Long Run

As people continue to live more sustainable lives as a result of the climate problem, there is a current drive towards sustainability as a more desirable focus for businesses. Positive climate impact across the entire value chain, improved influence on the environment, people, and atmosphere, and useful contribution into society will most likely be expected of businesses in the future. Companies will be held responsible for all parts of the industry, and any environmental damage or harmful emissions from production operations should be controlled or eliminated. In what is known as a ‘circular economy,’ it is also predicted that resources will be reused to accommodate the global growth in population. This transformation would allow one person’s garbage to become another’s resource, resulting in significant waste reduction and a more efficient supply chain.

As we approach the start of a new year, we’re acutely aware of the growing urgency in the climate movement, as well as the need for action to catch up to ambition. Not only for researchers and policymakers, but for everyone—business executives, negotiators, and communicators—there is still much work to be done. We have a better chance of constructing a sustainable future if we can share what is working.

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Economy

The Economic Conundrum of Pakistan

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The State Bank of Pakistan (SBP) is due to convene on 20th September 2021. The Monetary policy Committee (MPC) will be announcing its policy rate after retaining it since March 2020. As the world deals with the uncertainty of the delta variant along with the dilemma between inflation and growth, it is a plenary to watch as Pakistani policymakers would join heads to decide the stance on the economic situation. However, the decision would be a tough one. Primarily because the mixed signals could either lead to burgeoning inflation and subsequent financial deterioration or they should guide the central bank to strangulate the growth prematurely. Either way, the policymakers would have to be cautious about the degree of inclination they lean to each side of the argument – economic contraction or growth with inflation.

A poll conducted by Topline Research shows that about 65% of the financial market participants expect status quo; the MPC to maintain the policy rate at 7% to further accommodate economic growth. Pakistan has barely mustered a 4% growth rate after the contraction of 0.4% last year. In this regard, Mr. Mustafa Mustansir, head of Research at Taurus Securities, stated: Visible signs of demand-side pressure are still quite weak. In another survey conducted by Policy Research Unit (PRU): a policy advisory board of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI), 84% of the market participants believe there will be no change in the policy rate. The sentiment implies that the researchers and the business community don’t expect a rate hike in this week’s policy meeting.

However, the macroeconomic indicators paint a bleak picture for Pakistan’s economy: warranting a tougher policy response. The external trade figures released by the Pakistan Bureau of Statistics (PBS) project a debilitating situation for the national exchequer. According to the data, Pakistan’s trade deficit has increased to $7.5 billion in the first two months (July-August) of the fiscal year 2021-22. The deficit stands at $4.1 billion: 120% higher than the same period last year. Due to the accommodative policies implemented by the government of Pakistan, the trade deficit has already climbed 26% up to the annual target of $28.4 billion, set in the fiscal budget 2021-22. Despite excessive subsidies, the bi-monthly exports have only grown by 28% to stand at $4.6 billion. And while it is an increase of nearly a billion dollars compared to the same months in the preceding year, the imports have more than perforated the balance of payments.

During the July-August period, the imports have grown by a whopping 73% to stand at $12.1 billion: 22% of the annualized target. What’s more worrisome is the fact that despite a free-float currency mechanism, the exports have failed to turn competitive in the global market. According to the data released by PBS, Pakistan’s exports have dropped from their previous levels for three consecutive months. And despite a 39% net currency depreciation in the past three years, the exports continue to drift sluggish around the $2 billion/month mark. Yet, the imports are accelerating beyond expectation: clocking a 95% increase last month alone. Clearly, something is not working.

Moreover, while the forex reserves with the State Bank stand at a record high of around $20 billion, the rapid depreciation in the rupee is gradually damaging the financial viability of Pakistan. According to Mettis Global, a web-based financial data and analytics portal, the rupee recently slipped to its all-time low of 168.95 against the greenback. While the currency reserves are at their peak, the rupee continues its losing streak as the State bank has refrained from intervening in the forex market to artificially buoy the currency. Primarily because the IMF program stands contingent on letting the rupee float and find equilibrium. As a result, the rupee is touted to breach the 170 rupees against the US dollar mark by next month. The bankers around Pakistan have urged the State Bank for an intervention to put an end to “abnormal volatility in spite of increased reserves.” However, an intervention seems highly unlikely as the SBP Governor, Dr. Reza Baqir, already warned regarding currency devaluation in the last policy meeting: citing supply constraints, debt repayments, and increased imports as primary reasons for the temporal slump.

Nonetheless, almost 10% of the market participants, according to the survey, expect a rate hike of 50 basis points in the policy rate to hedge against inflation. Furthermore, analysts at Topline Securities expect a hike of 25 basis points to counter “vulnerabilities in the current account and control inflationary pressures.” Regardless of the prudent beliefs in the market, however, a few players actually believe that a rate cut of 50-100 basis points is plausible in the meeting. They argue that while the Consumer Price Index (CPI) – a national inflation measure – refuses to let down, the core inflation of Pakistan has dropped perpetually down to 6.3% in August. A stratum of the business community, therefore, also believes that the policy rate should be gradually brought down to 5% to match the regional dynamics.

I somehow find this notion ironic, as the government has already doled billions of dollars in subsidies, provided lucrative loans, and slashed taxes periodically. Yet, the exports have stayed relatively redundant. While it may not be the most effective time to hike the policy rate and tighten the monetary policy, in my opinion, a cut in the policy rate would be detrimental – catastrophic for the current account and incendiary for prevailing inflation.

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