Overvalued rupee hurts external trade: Mixed views on devaluation
By Sabihuddin Ghausi
KARACHI, July 22: While there is a complete consensus among the economists and the businessmen on the fact that Pakistan’s rupee exchange parity is overvalued, there is sharp difference of opinion when it comes to issue of reviewing, readjusting or devaluing the national currency.
Almost all businessmen and economists are convinced that the rupee parity is overvalued by at least 10pc that is causing stress on the external sector. While a few businessmen and economists consider a devaluation of 10pc in one-go as the “only right recipe” at this moment, there are others, who believe that this devaluation should be gradual and measured. But there are many who consider any idea of devaluation a recipe for destabilisation of whole system as it will set in motion a new wave of unprecedented inflationary wave.
“With devaluation, there is a need for other supporting steps by the government particularly to rein in mounting demand and growing consumerism that is showing no signs of respite,” is one of such ideas articulated in relaxed moments after sunset in an informal businessmen gathering.
Even in their relaxed moments after sunset, businessmen are unable to shed off the pressures that are coming from the implications of an unprecedented trade imbalance and a fiscal deficit in 2005-06. For the current fiscal year there are doubts if government would be able to mobilise resources indicated in the 2006-07 budget and contain expenditures in manageable limits.
“Exporters have been consistently demanding a realistic readjustment of the rupee parity,” Aziz Memon, a well-known readymade garment businessman, said while pleading a case for devaluation. Memon had been the Chairman of Textile Export Quota Management Directorate till end of 2004 and is said to have invested heavily in his business to keep his presence felt in the EU and USA markets after phasing out of textile export quota system.
Not ready to quantify the devaluation of the rupee, Memon insisted on a number of measures by the government that should cut the production cost down and enable the exporters to remain competitive in a market where a full fledged cut-throat price war was going on. He said that value added sector needed more support than others.
“I do not support devaluation,” Iqbal Ibrahim, owner of a giant integrated textile mill in Karachi remarked. “Whatever benefit we will get from devaluation, we will be forced to pass on these to our buyers,” he said. He conceded that Pakistan was getting only a residual share in textile exports to the EU and USA and was trailing behind India and China.
Mr Iqbal was of the view that rising imports manifested growing economy. “You need more energy, more machines and parts and raw material when your economy is growing,” he said. His suggestion was that the government should take steps to reduce production cost and the rest depend on the entrepreneurs. The businessmen should improve their management, production techniques, marketing and motivate their management team to respond to fast changing demands.
Majyd Aziz, a readymade garment dealer with a brand name in domestic market, was of the view that the government would not go for devaluation as “it is an election or near election year”. Devaluation of rupee, he believes, will increase import bill, push up debt servicing cost and increase the debt burden. Now elections are not too far off, the government will take easy route of subsidies and imports rather than a full-scale surgery of the economic system that devaluation will demand.
Akbar Zaidi, a noted economist however, is all for devaluation. In last seven years, exports increased by almost 100pc from $8.2bn in 1999-2000 to about $17bn in 2005-06. Imports increased by more than three times to over $28bn in 2005-06 from about $9.5bn in 1999-2000. The trade imbalance in last seven years has swelled by more than seven times from $1.4bn in 1999-2000 to more than $11bn in 2005-06.
Devaluation, Mr Zaidi believes, will be a deterrent rather than pushing up imports because it will make import an expensive business.
Asad Saeed, another noted economist, however, believes that Pakistan’s exports and imports are inelastic and are not affected by the devaluation. In the past too, devaluation did not bring any big improvement in the exports.
While opinions differ on devaluation and strategies for increasing exports there is a virtual consensus that Pakistan does not have much to offer as export surplus for the world market except textiles and that too in low value products. In last 60 years only one Pakistani exporter has ventured into brand name product who is marketing it in Far East through his outlet. “Pakistan business houses do work for international houses and departmental stores but lack enough skill and initiative to go for launching their own brand products in the export market,” said a top textile leader, adding that launching of a brand product in USA and EU cost anywhere from $20 to $25 million.
While individual businessmen and economists have conflicting views on devaluation issue, the State Bank and a reputed research institution Social Policy and Development Centre (SPDC) convey directly and in guarded language their reservations on exchange parity of the rupee. “The inflation differential between Pakistan and its trading partners has made the relative price of Pakistani goods — or the Real Effective Exchange Rate (REER) — 10pc higher,” observes the annual review report SPDC for the fiscal year 2005-06. It points out that since late 2004, the Pakistani rupee has depreciated only very modestly by a total of just one per cent. According to State Bank of Pakistan’s third quarterly report for 2005-06 released recently the rupee depreciated only 0.88 per cent against US dollar during July to May to Rs60.22.
Pakistan’s export performance in 2005-06 is not unimpressive but the imports have outgrown the expectations and projections of the government planners. The trade imbalance of more than $11bn plus about $5bn gap in services has been met largely from remittances, aid inflows and privatisation proceeds during 2005-06. “However, there is a risk of the sudden slippage of these flows in the future. This is specially so in the current environment of lower global appetite for risk, which is leading to withdrawal of assets from the emerging countries,” warns SPDC annual review report.
