Only a couple of months back, I had written extensively on why devaluation of the Pakistani rupee would be a mistake. There were some good reasons for my opinion, foremost being that since the government was contemplating this move primarily to resurrect Pakistan’s dwindling exports, it ought to be cautioned that over long-term currency devaluations do precious little to boost a country sustainable exporting fortunes. And specifically in our case devaluation may not bring much joy even in the short-run. Textiles constitute bulk of our exports (between 55-60%) and perhaps the only real manufacturing industry that operates at global competitiveness - the other exports in services, gems & jewelry, furniture, fisheries, information technology, being mainly design, skill or niche oriented where price is only one of the many factors in influencing customers decisions . If the aim was to raise textiles’ manufacturing competitiveness through devaluation, then the strategy won’t hold. It is important to note that cost of doing business at home has primarily gone up due to poor business environment and governmental inefficiencies (utilities, unnecessary oversight, corruption, liquidity squeeze, etc) and devaluation would in-effect just end up subsidizing these inefficiencies. Further, devaluation in isolation cannot achieve much unless the demand abroad is price elastic. So, in essence, real solutions lie in fixing our supply side bottlenecks and not in devaluation.

Secondly, it is always good to learn from history. India jumped from exports of merely $25 billion in 1991 to nearly $300 billion today; China’s meteoric export-climb since 1989 (year of its joining WTO) is well known; Brazil tripled its exports from 1997 to 2007; and Bangladesh’s climbed from nil textile exports in 1995 to over $30 billion today, with the point to note here being that these export success stories came about in a period where their currencies held their own and remained stable. In fact, in cases of China, India and Brazil, if anything, their currencies during this period instead tended to be firm against other global currencies.

Thirdly, we must keep in mind that Pakistan has almost always been a country with a current account deficit (CAD), meaning our imports have exceeded exports. And with bulk of our imports being inelastic in nature (fuel oil, edible oils, food items and pharmaceuticals), devaluation would mostly mean an added pressure on CAD. Fourth, Pakistan’s external debt (in foreign exchange) is very high and devaluation would mean a jump in external liabilities without adding any capital value against assumption of this additional liability. Fifth, Pakistan is moving through some very challenging times vis-à-vis geographical and political security situation and devaluation would seriously compromise our ability to successfully manage our security needs, which are significantly import based. Last but not least, sixth, an eroding currency value is invariably accompanied with multiple economic undesirables: stokes inequality in-turn widening the income gap; adversely affects fair distribution of economic opportunities; high capital costs favor monopolies and make start-ups so much more difficult; real estate prices often move beyond the reach of average citizen; encourages corruption as ill-gotten foreign wealth portfolios multiply over night; necessitates change in on-going policy choices (for example, all calculations on privatization benchmarks become redundant as replacement costs and intangible anti-trust values of a state run enterprise become so much dearer); and somehow the very act of devaluation automatically converts itself into a negative economic perception, eroding national confidence, leading to flight of capital.

However, having said this, the reality is that economic management cannot be frozen in time and astute policy managers need to realistically adapt to changing times and shifting global realities. Today, more than ever, the global economy is looking shaky. Markets for things, as diverse as oil and European bank shares, have plumbed new lows. Japan is teetering on the brink of persistent recession, Europe is mired in low growth, United States is facing a drag on growth as the strong dollar makes it cheaper to import instead of buying from American businesses and China, the world’s engine of growth, is struggling with heavy debts, a slowdown in manufacturing, stagnant exports and flight of capital. The tried-and-true cures no longer seem to be working. So the question arises, what is the new monetary tool, which more and more countries these days are beginning to resort to? The answer is, ‘devaluation’. As evident in their February 2016 meeting, gone is the once firm commitment amongst the G-20 members to “manage their currencies responsibly, rather than shifting their value”. The Euro went through its own long process of decline during 2014-15, shedding more than 20% in value, China’s devalued in the second half of 2015 and then since Rinminbi became one of the reserve currencies of the world (in-turn also putting added pressure on rival ASEAN exporters to do the same or risk losing their competitiveness), Russia and Brazil have recently allowed their currencies to fall steeply against the dollar (nearly 20%), and of late we have seen the Pound Sterling drop its value by more than 10% in less than a quarter. A currency war seems to be on, raising fears of beggar-thy-neighbor devaluations of the sort seen in the 1930s, which led to a collapse of international trade.

Given this scenario it would be foolhardy for Pakistan’s financial managers to just sit on the sidelines and do nothing. If they don’t act now, the repercussions could be grave. However, they need to move with care, because Pakistan seems to be faced with a double edged sword.

Given our rather high and expensive debt profile a knee-jerk action can just bring the whole economy down. So what should they do? First, they must realize that today is no longer the case of devaluing to merely gain export competitiveness, but it is more to do with adjusting Rupee parity back into the place where it was, say at the start of this fiscal year, July 01, 2015. This in itself will minimize the immediate devaluation target. Second, they must learn from the latter period of Musharraf government, where the Pak Rupee was artificially kept higher and once it left the incoming PPP government had to face the brunt of a rupee free fall of nearly 25% at the time. Nothing can be worse for an economy than such big upheavals cum jolts and we have seen that the economy has never really recovered from this shock till today. A gradual decline in value is always the prudent way forward. Third, this is the ideal time for devaluation since inflation is at an all time low and its negative fall outs on the common man will be comparatively minimal. Further, since this low inflation is mostly on back of external factors and not due to any sound management by the government, this window may not last very long. Finally, if it is left for too late, Pakistan will not only face loss of jobs at home, but lose global market share, which once lost can be extremely difficult to regain or can take ages to do so. And it is in this context that I have reviewed my earlier recommendation to instead advocate a 5% Rupee devaluation, for now, and with immediate effect. This may not fill the entire gap, but then with debt maturities staring in our face in not too distant a future we need to tread carefully.