After a policy decision to allow rupee depreciation, the State Bank of Pakistan (SBP) will now let the currency exchange rate adjust to market conditions after many months of a floating rate.
The currency adjustment is supposed to lower foreign currency holdings from commercial banks back to official reserves and help divert remittances to official channels. A favourable settlement with the IMF is estimated to stabilize the economy a little and discourage imports.
However, the track record of rupee depreciation in Pakistan is not good. While on paper, it is a good move, especially for exporters; the past decade has seen devaluation of rupee with no progress in exports. There is a structural weakness in our economy that our exporters do not know how to take advantage of the rupee depreciation. While the tax on imports should be a good thing, especially for luxury items, the hike in imported necessities, such as the inevitable hit on oil and petrol could be greatly damaging for every field in the country. Increase in import prices do not necessarily mean lesser imports.
Moreover, the devaluation means that Pakistan’s debt increases in billions overnight, which could be troublesome for the loans Pakistan has taken for CPEC.
However, the confusion with finance is while devaluation may have many potential setbacks, it is better than artificially maintaining the rate, as SBP was doing. The artificial maintain not only is crucifying to the spirit of exports, and causes subsidisation of luxury imports, but creates much international pressure, as well as wastes state reserves.
Rupee devaluation is a double-edged sword, depending on Pakistan’s strategy with exports. There seem to be hopeful signs that this administration is changing the conversation around uplifting exports and bringing down imports- the Economic Coordination Committee in October introduced taxes on luxury imports and incentive packages for exporters.