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Devaluation alone won’t help

Updated March 26, 2018

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The Pakistan Stock Ex­­change’s benchmark KSE-100 index surged by 1.77pc last Tuesday as the central bank allowed the rupee to weaken by around four per cent against the dollar in a bid to contain balance-of-payment pressure.

The government expects a weaker rupee to help prop up the country’s flagging exports in addition to tackling the growing current account deficit.

But exporters don’t seem impressed by the second currency devaluation in less than four months that saw the rupee fall by around nine per cent since December.

“Currency devaluation doesn’t offer long-term sustainability… rather it increases the cost of doing business by pushing prices of energy, raw materials and transportation, and encourages (foreign) customers to renegotiate their orders for discounts,” M.I. Khurram, a major Lahore-based knitwear exporter, argues.

“Devaluation isn’t the answer to declining exports. It has a very brief impact on exports. The government must fix the fundamentals to boost exports. Ad hoc, day-to-day transactions will not help.”

Believed to be the result of devaluation in December, the current account deficit slowed down by 26pc month-on-month last month to $1.2bn from $1.7bn in January. But it has swelled by 50pc year-on-year to $10.8bn or 4.8pc of GDP in the first eight months (July-Feb) of the present fiscal from $7.2bn or 3.6pc of GDP.

Exporters don’t seem impressed by the second currency devaluation in less than four months

The current account deficit was recorded $12.4bn or 4pc of GDP last financial year. Rising trade deficit of $23.2bn on the back of sharply surging imports remains the most important contributor to the widening current account gap.

“There is a kind of panic in governmental ranks because of the ever increasing trade deficit and devaluation has been done to address this.

“Sadly, the move doesn’t address the situation adequately and will have more negative effects, among other things, in terms of inflation, weakened purchase power, increased (external) debt liability and higher import bill, ” argues Faisal Mamsa, the chief executive officer of Landmark Investment.

“But, then, the government didn’t really have any other option but to devalue the currency in the face of slowing exports and stagnating foreign direct investment flows. After all, you have only one option of devaluing your currency when your international reserves are draining fast and you are unable to finance the current account deficit. The drawdown of foreign currency reserves must have weakened the central bank’s ability to intervene in the market,” Mamsa notes.

“Pakistan has a large potential for increasing its exports and attracting foreign private investment into export industries provided the government somehow is able to address the issues constraining the country’s export competitiveness. A weak exchange rate is not the answer to challenges facing our exporters.”

Abdul Aleem, the chief executive of the Overseas Investors Chamber of Commerce and Industry (OICCI), is not very hopeful of a significant impact of devaluation on the country’s growing trade deficit.

“The weakened rupee may act as deterrence to rising imports by somewhat curbing inflow of luxury items, but is unlikely to boost exports because they are not exchange rate sensitive. You need to bring down the cost of doing business to make your exports competitive internationally.”

On the other hand, the OICCI that represents nearly 200 foreign companies operating in 14 different sectors of the economy is worried about a further rise in their cost of doing business as the weaker exchange rate will push the prices of imported inputs, oil and so on.

“Overall the cost of doing business for most companies will rise — in certain cases significantly, which will make some of them raise their prices, stoking inflation beyond the current 3.8pc and encouraging the central bank to increase its interest rates.”

The weaker rupee is generally believed to help enhance competitiveness of textile exporters. But Seth Mohammad Akber, a yarn and cloth manufacturer who has seen his 150,000 spindles and 120 jet looms close down in the last couple of years, laughs at the suggestion.

“Devaluation could have helped textile exporters 10-12 years ago but not now. At that time the industry was upbeat about the future, growing fast and making money. People would reinvest in technology to stay competitive and keep ahead of their regional rivals in the international market,” he says.

“A lot of water has flowed under the bridge in the last 10 years. Energy shortages under Asif Zardari and higher power and gas tariffs under Nawaz Sharif have turned the textile industry in Punjab into junk during these years.

“We are now competing with a modern industry in China, India and Vietnam where manufacturers are using the latest technology that is 30-40pc more efficient than ours, requires lesser manpower than ours and produces better quality yarn, cloth and garment.”

He is of the view that the exchange rate devaluation may contribute to the planned amnesty scheme that the government intends to announce to encourage Pakistanis to bring back their offshore assets, but will not help revive the industry.

With almost 100 spinning and weaving units already shut down, another 20-30 are said to be on the brink. “If the government is interested in reviving exports it has to immediately significantly cut electricity prices by withdrawing surcharge of Rs3.60 per unit levied to make up for the power losses and theft.

Published in Dawn, The Business and Finance Weekly, March 26th, 2018