Short thread to divert your attention from the brouhaha.

Government and its advisors criticized previous regime for import and consumption based growth and hinted at moving towards export oriented growth strategy similar to examples of Malaysia, China, Korea etc

These countries embarked on this by reducing consumption and increasing investment primarily through three pronged strategies and built huge current account surpluses:

1. Devaluing currency
2. Restricting imports
3. Low interest rates

These policies made their exports competitive and imports expensive resulting in exports becoming more than imports resulting in trade surplus ,which being major component of current account meant that they have consistent current account surpluses.

How does it work?

1. Cost of goods comprise of material and wages. Devaluation meant that wage cost would decrease in dollar terms even if the wages remain the same in local currency. Based on proportion of cost that is labor, total cost goes down even if material is imported.

This will make the exports competitive and should lead to increase in exports.

2. Imports are restricted by applying both tariff and non tariff barriers. This makes imports expensive and consumers and businesses reduce use of imported goods.

This leads to reduction in imports.

3. Finally, for exports to increase and remain competitive, exporters need enhanced working capital and expand production facilities at cheap rates. The banks are directed to provide financing to these exporters at cheap rates.

So what did we do?

We did
revaluation of the currency , imposed tariffs on imports
Raza Abbu (because his pedigree is such no one dare question him) increased interest rates.

The Asian tigers, Japan and China all had low interest rate during this period to stimulate industry but Raza Baqir applying the policy that worked well in that economic powerhouse Egypt.

If the plan is to stop consumer finance, it can easily be done by increasing lending risk weights for consumer finance. increase in discount rate just to attract investment in government T-bills is a strategy to reduce industrial activity and its working just as it’s supposed to.

Here is a short thread where I debunk the theory that discount rate doesn’t affect credit from lovers of Raza Baqir. https://twitter.com/2paisay/status/1197978366055456773

If the next stage is to offer/expand interest rate subsidies and zero rating by another name to prospective exporters to nullify the impact of discount rate on them, raises the question what really is the objective here.

Attracting foreign money in T-bills. This will increase the demand of rupees as foreigners will sell dollars to buy rupees and use rupees to buy T-bills. Resulting in appreciation of rupee against the dollar partially reducing the benefit of devaluation.

Makes you question why RB insisting on a policy that is at conflicts with rest of the strategy.

Commercial banks who use to keep max net open positions in dollar to benefit from depreciation now close their position daily so as to not incur a loss in fx fearing appreciating rupee.

If the rupee appreciates, export competitiveness will go away unless government’s justification that over valued rupee was holding back exports was hyperbole or government had excessively devalued the rupee through fear mongering or/and incompetence.

If you wanted to increase depth of capital market, remove the lacunas and road blocks that is preventing local investors to invest in debt market and local corporates to issue commercial debt. But no.

How is removing all road blocks for foreigners to invest in 3 month T-bills any better than giving incentives to Chinese businesses in CPEC which aren’t offered to local businesses if all the criticism is to be believed?

I wonder if any of these Asian tiger countries ever thought of encouraging carry trade in their government securities when they were embarking on their export strategies. Korea with its huge surplus discourages it even now.

Oh well, RB has PhD from Berkeley and i am just a simple masters.