Rumors are abuzz that the Pak Rupee is likely to be devalued by nearly 13% before the end of the next fiscal year. According to reports, the International Monetary Fund (IMF) has taken into account the rupee-dollar parity at Rupees 113.70 to a dollar while making projections for the current fiscal year – a rate that implies over 13% depreciation of the Pak Rupee against the US Dollar and an average rate that will approximately work out at 111.40. Even during the last fiscal year, the IMF had claimed that Pakistan’s rupee was overvalued and had worked out its value at Rs. 114 to a dollar. After an initial fall in 2013-14, the State Bank of Pakistan and the Ministry of Finance intervened and were able to shore up the rupee, bringing the parity to around 98 and average rate parity to 102.80. Naturally, the report and recommendations of the IMF carry a lot of weight. The rationale behind its working being that a downward exchange rate can play an important role in accelerated reserve accumulation, and in increasing our exports over time.
One can only hope and pray that the Pak government does not accommodate this view of the IMF, because nothing could be worse for our long-term interests than embarking on a senseless devaluation spree. In fact, without wasting more time, the government, in order to neutralize the prevailing market sentiment - on the likely rupee-dollar parity going forward - should issue a categorical and firm statement clarifying it has no such intentions and will do everything possible to safeguard the rupee’s value against the greenback. This is also the foremost duty of any central bank governor: “to safeguard the national currency.” Further, it is also important for the government to itself be convinced on why devaluation will not help the cause of our economy at the stage it is in. First, we need to realize that textiles constitute the bulk of our export earnings (between 55-60%) and perhaps the only real manufacturing industry which is operating at global cost competitiveness. The other exports in services, gems and jewelry, furniture, fisheries, information technology, etc are either design, skill or niche based and price is only one of the many factors (and certainly not the major component) considered in a sourcing decision-process of the customers. So when an argument is given that as Pakistan’s economy has a consistent inflation rate of 10% or more, the only practical solution to remain competitive in manufacturing is in devaluing the rupee each year, the argument primarily applies to the Pak textiles sector. However, for textiles, this devaluation argument is not so straight forward and instead needs to be looked at from the perspective of how price elastic the demand of our products in the global markets is. Pakistan’s textile exports are by and large amongst the lowest in terms of value addition (on average under $4.50/kg, whereas, China is in excess of $20, India $12 and Bangladesh around $10 per kg), which means that simply bringing the price down will not necessarily help sales.
What is actually required is to encourage the industry to add value by way of resorting to economies of scale, innovation and entrepreneurship. And to achieve this, the government needs to focus on solving the energy issues of the textile industry and to undertake some basic structural reforms: cut down on red tape, facilitate human resource development, minimize the contact between the business and the regulator, improve law and order, reduce barriers to forming a productive manufacturing environment etc. Pakistan’s domestic per capita consumption of textiles is quite low – often considered one of the principal barriers to ‘brand’ formation – and given our production capacity, there is heavy reliance on international markets where dependability (consistent and timely supplies) holds the key. In short, any meaningful growth in Pak exports is going to come from fixing our supply side bottlenecks and not by simple devaluation of our Rupee.
Before one goes any further, it is important to study the history of economies that have had major export breakthroughs over the last two decades. For example, India, China, Brazil and Bangladesh: India has jumped from exports of merely $25 billion in 1991 to nearly $300 billion today, China’s export climb since 1989 (year of their joining the WTO) cannot even be properly defined in worlds, Brazil nearly tripling its exports from 1997 to 2007 and Bangladesh’s climb from a meager $4 billion to around $30 billion; in all these examples, the important common point to note is that their export growth has taken place amidst a period during which their respective national currencies remained fairly stable. In fact, in the cases of China, India and Brazil, their currencies can be described as remaining rather firm against other major global currencies let alone losing value in any way. The cases of Malaysia, South Korea and Singapore have also been no different. We saw that even when there was immense pressure on China to move its Renminbi the other way, meaning upwards as it was being billed as under-valued, the Chinese resisted by opting for stability. Fudon University and China’s WTO Secretariat have a joint study to their credit on how exports both in quality (innovation & value addition), and quantity terms benefit in periods where there is economic and exchange rate stability, and how it suffers during times of frequent currency jolts. The study also elaborates on how countries indulging in frequent devaluations in essence self-create the barrier of ‘capital cost’ for entry into high-tech or value-added sectors, which then relegates them to a ‘capital trap’ of low-end manufacturing, leaving little chance for future upward mobility.
Second, 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. Also, it is pertinent to note that the bulk of our imports are inelastic in nature since they constitute essentials like fuel oil, edible oils, food items and pharmaceuticals. A near 13% devaluation would mean an even larger CAD and given that oil prices are likely to be bullish in coming months – political situation in Iraq and Libya, and the fact that winter is fast approaching – the move could simply prove disastrous for our external account. Such cycles tend to be vicious as high oil import costs would mean higher inflation and reduced manufacturing competitiveness, in-turn negatively affecting the very initiative itself of endeavoring to boost exports through devaluation!
Third, Pakistan’s external debt (in foreign exchange) is very high and a 13% devaluation would mean a jump in our external liabilities by as much. That too in a single stroke without providing us any additional capital value against the assumption of this additional liability. Fourth, Pakistan is moving through some very challenging times vis-à-vis geographical and political security situation both at home and internationally. This means that our defense forces will require extra funds at their disposal, especially when our neighbor is regularly upping the ante by increasing its defense budgets. Since defense equipment is still largely outsourced, devaluation at this stage could also seriously compromise our ability to successfully manage our security situation. Finally, eroding currency values are invariably accompanied with multiple economic un-desirables: it stokes inequality as prices at home spiral, in turn widening the income gap and adversely affecting fair distribution of economic opportunities; high capital costs favor monopolies and make startups so much more difficult; real estate prices often move beyond the reach of the common man and in cases also that of the middle-income category; devaluations are automatically linked with the dwindling fortunes of an economy and this perception cum loss of confidence leads to the flight of capital, stokes corruption, and requires a sea change in on-going policy visions. For example, all calculations on privatization benchmarks will need to be revisited since the replacement cost and the anti-trust value of a state run enterprise will become so much dearer!
The writer is an entrepreneur and economic analyst.
kamal.monnoo@gmail.com