Before the sway of financialisation of the global economy, a strong currency was generally seen as a sign of robustness. But it is not so by many now.

Even the hard currencies like the dollar and the euro represent troubled economies like that of the United States and European Union respectively. The reason is that the dollar is a dominant global currency and euro, essentially regional, is competing with the greenback for a greater share in the international exchange market. The Chinese yuan is also making its increasing presence felt in the global market, backed by a robust economy.

And to protect the value of their money from many depreciating national currencies, investors from around the world prefer to keep their funds in hard currencies, considered to be a store of value. Countries suffering from a chronic balance of payments problem and boom and bust cycles such as Pakistan may have abnormally weak currencies. But some national currency markets show a contrary trend. On the back of higher exports and faster economic growth, countries like India and Bangladesh have stronger currencies compared to Pakistan‘s weak national unit, lower exports and slower expansion of the domestic economy.

On February 9, the parity of the dollar with Pakistani rupee was 159.90, Bangladesh Takka 84.73 and Indian rupee 72.84. However, the Pakistani rupee value is currently showing some stability and nominal appreciation whereas the two other currencies are depreciating.

Rs3 trillion has been spent on effecting a much-needed correction in the rupee-dollar exchange rate since the PTI government came into power — critics say it has turned out to be a very expensive correction coming at the cost of public goods

In case of Pakistan, the value of the national currency is now determined by the day-to-day market demand and supply of the greenback which is a deviation from the previous practice of linking it to its real effective exchange rate.

Given the fluctuating market exchange rates, the international agencies use purchasing power parity of a national currency with the dollar to get a more accurate estimate of a country’s GDP size.

Apparently, countries with stronger currencies have higher productivity, particularly India, because of much better labour management skills and faster adoption of the latest technologies.

They also exercise their economic sovereignty more prudently with well thought out policies to build an export-oriented manufacturing base with better global outreach. No less important, India has pursued protectionist policies to enable infant industries to grow into competitive ones. Protectionism is now receiving fresh impetus worldwide owing to faltering debt-driven financial globalisation.

US President Joe Biden is continuing with former US president’s Buy American policy. On January 25, he signed an executive order to put more of the $600 billion of annual federal government spending into American hands. He says American taxpayers’ dollars should be spent on American goods and with American made parts.

Earlier, former President Trump had signed 10 executive orders to push out foreign suppliers from the US market. Biden’s protectionism enjoys strong support in the US Congress.

On the other hand, Pakistan has most of the time tried to resolve the problem of low productivity of narrowly based export activities with the oft-repeated patent solution: monetary and fiscal stimulus including devaluation to help exporters earn more rupees but with fewer dollars for more goods sold. The adverse terms of trade results in an outflow of resources abroad.

The continuing rupee depreciation virtually obviates the need for raising productivity and quality of goods as there is a ready market for low value-added products in developed countries trying to keep wages of blue-collared workers low. For example, in January exports to Canada shot up by 43 per cent, Australia 42pc, US 36pc and the UK 21pc.

While the monetary policy is designed to keep inflation low by rupee depreciation, says Prime Minister Imran Khan, it is the main reason for high inflation in the country. Both businesses and common citizens are hit by cost-push inflation but the poor and vulnerable consumers are the worst suffers.

And the government suffers revenue loss by allowing duty-free imports of industrial raw materials/inputs made expensive by the sharp fall in rupee value.

According to the Federal Board of Revenue, a 29pc increase in duty-free imports was noted in import value on those items which are covered under various exemption schemes meant for export facilitation. In the first seven months of this fiscal year, the import value of industrial inputs went up to Rs323bn from Rs225bn from a year-ago period. Simultaneously, the value in various exemption regimes shot up to Rs987bn from Rs825bn. All this discourages import substitution and value-addition.

According to Pakistan’s Bureau of Statistics data, the import bill in January was recorded at $4.73bn as against $4.121bn in the same month last year. Simultaneously exports went up but at a slower pace, to $2.13bn from $1.97bn.

The current exchange rate policy has also negatively impacted the government’s finances as debt servicing costs have shot up because of rupee devaluation, swelling overall fiscal deficit.

While highlighting the country’s foreign debt profile, Finance Minister Dr Abdul Hafeez Sheikh informed the Cabinet on January 26 that the incumbent government has spent Rs3 trillion on effecting a much-needed ‘correction in rupee-dollar exchange rate’ since the PTI government came into power. Critics say it has turned out to be a very expensive correction.

It shows how the taxpayers’ money, instead of being spent on public goods, is being diverted to foreign debt servicing. The finance ministry has been able to keep the primary fiscal balance in surplus for the past two years by observing austerity including the traditional approach of cutting development spending when current expenditure urge. During July-December 2020 the federal development spending fell by 16pc in nominal terms and more in real terms owing to high inflation.

The recovery in manufacturing plus food imports have resulted in the trade deficit widening by 21.03pc in January to $2.6bn. In the first seven months of this fiscal year, the trade deficit was recorded at $14.96bn as against $13.82bn in the same period last year. And the current account, running in surplus for the previous five months, turned into a deficit of $662 million in December 2020.

The current account deficit (CAD) will be restricted, according to the State Bank, to 1pc of GDP in this fiscal year. One reported independent estimate is that this fiscal year will end with a CAD in the range of $4-6bn.

To sum up, the drastic fall in the rupee’s value has reduced the space for savings, investment and capital formation.

Published in Dawn, The Business and Finance Weekly, February 15th, 2021