The rupee is nosediving, foreign reserves are evaporating and political instability is proliferating. The financial watchdogs are painting a dismal picture of our future. The economic experts have earmarked us for imminent default. The consensus view is that rupee devaluation will have disastrous consequences for our already brittle economy.
However, less thought has been given to the opposite nature of rupee devaluation. Not everything is wrong with the downfall of our currency. Let me explain the bright side of rupee depreciation which is rarely discussed: the glass half-full view.
The foremost advantage of a weak rupee is that it increases the competitiveness of exports by making them cheaper and conversely making imports more costly. Pakistan, which is struggling to keep pace with the ever-increasing import bill, is likely to benefit from this arrangement as it will reduce our reliance on imports.
The export industry will gain more incentive to increase production and is likely to contribute to bolstering exports’ growth. However, all of this is contingent upon the rightful implementation of the austerity measures put in place to curtail our import bill and the reduction of the export refinance rate.
Though a weaker rupee is more closely associated with doom and gloom, it does have a set of advantages
Frequent payments on the import of oil have drained the foreign currency out of our economy and worsened the balance of payment crisis. But keeping an idealistic view of things as the international oil prices have fallen in the past few weeks, a weaker currency can help us shrink the existing trade deficit. With exports being our most significant foreign exchange earner in addition to remittances, an uptick in the former will provide much-needed stability to the fluctuations in the exchange rate.
Foreign capital inflows to Pakistan have dried up, owing specifically to the perpetual political instability. Even with such lucrative returns on T-Bills and Pakistan Investment Bonds, foreign investment is hard to come by as long as the creditworthiness of our economy remains in question.
But there may be light at the end of the tunnel. If the political infighting subsides in the next few months, foreign companies would be tempted to capitalise on the weak currency by investing in domestic industry and gain access to the relatively cheaper assets and labour market here in Pakistan. The inflow of foreign direct investment would not only tilt the exchange rate in favour of the rupee but create more jobs and influence the GDP positively.
Pakistan has accumulated a huge burden of foreign debts and the devaluation of the rupee will eventually make the interest payments even costlier than before. However, the bright side suggests a trade-off. A weak rupee would make the payments on domestic debt relatively less expensive as inflation would make the real returns on government-issued debt appear dwarf in comparison with the nominal returns.
Ukraine, which had an external debt of $130 billion at the conclusion of 2020, has depreciated its currency by almost 25 per cent to provide an impetus for its export market and ease up the pressure on its foreign reserves. Ukraine is a major exporter of iron, steel, and wheat and this move comes at a time when inflation and economic uncertainty have pushed this war-torn country back against the ropes.
China has also been notorious for currency devaluation on various occasions, most notably during the trade War with the United States back in 2018 which helped the Chinese exports gain traction in the international markets. Pakistan, though not deliberately, can benefit from the devaluation of the currency by cashing in its huge dependence on exports.
Rupee devaluation may turn out to be a blessing in disguise for us but getting the nod from the policymakers to endorse this unpopular opinion bears a significant political cost. Even if the Russia-Ukraine conflict is resolved, the other obvious impediment towards utilising rupee devaluation persists, ie the appeasement of voters.
The whole political narrative in Pakistan is built around a strong currency which overshadows the benefits likely to emerge from a weak rupee. Moreover, the public outcry on domestic inflation and rupee devaluation is difficult to evade, especially in the context of the general elections ahead.
That is why it is important to lure all the major political parties to put aside their blame games and sign the Charter of Economy, which would not only transcend political barriers but also direct inclusive economic institutions to act in the best interests of the country.
The author is a finance graduate from Nust Business School
Published in Dawn, The Business and Finance Weekly, August 8th, 2022