The State Bank’s strategy to defend dollar through market intervention, as an export-boosting mechanism, needs to be reviewed and revised, after gaining the much-needed stability in exchange rate in the wake of growing foreign exchange reserves and erosion in the dollar-value vis-a-vis the world currencies in the US market itself.

The rupee which symbolizes economic stability and sovereignty, must be managed and once it acquires necessary strength, it must be allowed to float freely.

The reserves accumulated through purchases of dollars from the open market in huge quantity, did pay rich dividends inasmuch as it facilitated the timely discharge of all liabilities, including payment on account of debt-services and prevented the currency from continued downward slide. The rupee had depreciated by about 17 per cent in FY-200-01, but the State Bank’s intervention in the open market reversed the declining trend. Resultantly, the reserves touched a mark of $3.05 billion by June 2001, rendering the exchange rate stable at around Rs 64 for the next three months.

The ready availability of foreign currency, in pursuance of demand, in fact curbed speculation. This approach strengthened the rupee which appreciated by 6.6 per cent after September 11 and remained stable at the new level of Rs 60 for nine months or so and now it is stabilized at Rs 59.55 when the foreign exchange reserves have touched a record level of over $ 7 billion.

After the accomplishment of a well-defined objective of stable foreign exchange rate, the buying of dollar must not be prolonged, just to keep its value artificially higher to sustain the competitiveness of our exports. There is no evidence to substantiate the fallacy of augmenting exports through devalued / depreciated value of currency. In Pakistan also, even massive devaluation in the past could not provide cushion to the dwindling export and the resultant sagging of the economy. Such a strategy could at best be rewarding in short-term, but in long term, an import-based economy, like ours, is bound to manifest its multi-dimensional adverse impact and implications for the economy, through expensive imports, acceleration in foreign debt liability and other international payments.

The higher value of dollar, in terms of rupee would ultimately inflate the import price of machinery, raw-material, chemicals etc., thus inducing the cost-push inflation and rendering the exportable manufactured items uncompetitive in the world market. The abnormal hike in the prices of tea, edible oil, petrol and petroleum products would exert a chain-effect in the economy and sap the propensity to consume. Let, therefore, the rupee must take its natural course of value and the dollar-rupee parity must come down to 1:55, as is rightly being anticipated by the experts both in Government and private sectors, instead of $ 59.5 A reduction of rupees 3 to 4, would make much difference in import value of around $11 billion, earmarked for the current fiscal year.

This phenomenon, in our external trade, could be explained by quoting the exports for the FY-2000-01, when the average exchange rate was Rs58.5844, having been depreciated by about 17 per cent, but there has not been any upsurge in the exports, which amounted to $9.2 billion. In FY 2001-02, the exports remained almost at the same level of around $9.2 billion, having the rupee been appreciated by about 7 per cent and despite the heavy odds experienced by the export sector in the wake of cancellation of export orders and imposition of war risk insurance surcharge etc. A disquieting and disturbing feature of our export trade has been the low average unit price.Not only during the outgoing year, when our currency and particularly export sector have to withstand the adverse impact of exogenous shocks, but also during the FY-2000-1,

Pakistan has experienced decline in unit value of the major exports, ranging between 4.8 to 25.4 per cent. An analysis of latest figures of exports reveals that the textile quota exports to the US, the EU, Canada and Turkey grew by over 18 per cent with nominal increase in value during the first seven months of the calender year 2002, compared to the corresponding period of preceding year. The average unit price of Pakistan’s textile quota exports dropped considerably by 30 per cent in case of the US, 9.6 for the EU and 16 per cent in case of Turkey.

This points to the fact that depreciation of currency will not act as a determinant of export promotion alone, unless it is duly supported and supplemented by exportable surplus, quality control and effective and efficient techniques of marketing. The low average unit price establishes one thing that the exporter still has the margin of earning profit, which is perhaps compensated by the low quality of goods. What is important to understand, is that the buyers in world market, especially those of European Union, America and the Middle East are more quality-conscious rather than of price.

In fact, our export sector is plagued by a variety of factors. Its base continues to be thin and concentrates only in few items. About 65 or 70 per cent export-earnings are derived from the textile and textile-based products. During the outgoing fiscal year, the hostile external environment, in conjunction with the world-wide recession, particularly in the economies of major trading-partners, also acted as a major inhibiting factor in the acceleration of growth in exports.

the export does not take place in isolation and its pace and pattern is determined by the trend in industrial and agricultural production. What is, therefore, imperative, is to gear the pace of production to its optimum level. The government, despite assurances, has not been able to remove all irritants/ constraints in one go. A key cost-escalating source in the industrial input, which, in the shape of frequent exorbitant increases in the utility charges/including electricity, gas, has had a deleterious-effect on the growth and development of trade and industry. In such export-oriented industries, in which the power-component of the aggregate cost of production is quite sizable, some mechanism must be evolved for its refund on export.

Our industrial products can compete and survive in the global market, on providing an even-playing field. Another retarding factor is the failure of government department’s concerned to evolve a quick re-imbursement / refund system of sales tax/duty draw-drawback. Search for a new mutually acceptable formula, as a replacement of infamous SRO-417, continues to persist unabated.

An erroneous perception exists in certain circles that a depreciated rupee value serves as an impetus to the workers to send their remittances in foreign currency to their country on the expectation of getting more money. The factual position, however, is that the workers have no option, but to send their remittances to support their families. There is no evidence of more inflow of home remittances into the country, when the value of rupee was relatively lower in terms of dollar. In FY 1999-2000, remittances amounted to $ 983 million and in FY 2000-2001, went to $ 1087.

During the FY 2001-02, when the rupee was relatively stable, the home remittances have already crossed $ 2 billion. This phenomenon of upturn could be attributed to a multiple factors: Firstly, there has been a crackdown on Hundi/Hawala system in a world-wide perspective and particularly in USA and UAE. This has forced the Indians and Bangladeshi workers also to send their remittances through legal channels. In Bangladesh, the remittances have already touched a mark of $3 billion. Secondly, the elimination of premium between inter-bank and open market foreign exchange rates provided no charm for using other channels than banking. Thirdly, the confidence of Pakistani expatriates, to keep their funds in the foreign countries has shattered, due to anti-Pakistan policies being pursued by some countries.

Finally, the banking reforms and persuasion and motivation by foreign-based Pakistani banks to the workers and expatriates, have had a salutary impact on the inflow of home remittances. In Pakistan, the existing potential of home remittances is within the range of $3 billion. Earlier, when the premium between bank rate and open market was 2/3 rupees, the State Bank had to purchase around $ 1 billion from the open market, which was in fact, the amount of remittances of workers.

The economy of USA, our largest trade partner, which has in dire strait, following the persistent recession, suffered a serious set-back in the wake of September 11 episode. Thereafter, the economy started showing strong signs of recovery, as a consequence of a package of huge tax-cut and record low rate of interest. There was almost 6 per cent growth in GDP during the initial three months of the year, but the accounting scandal, mainly known as Enron scandal, has had a crippling effect on US stockmarket, thus miserably shaking the confidence of the investors, who opted to shift their portfolio and direct investment in the euro zone.

Meanwhile, the trade deficit moved as high as $31.63 billion in May and the gap could not be bridged by the usual capital inflows. At the same time, the growing unemployment of around 6% did not augur well for the economic recovery. Therefore, the persistent losses in the state’s assets/stocks, combined with the mounting trade-deficit as well as growing unemployment have mainly contributed to the erosion of value of dollar so much so that its role as a lead-currency, is now being questioned. The dollar, during a short-span of time considerably slipped down in terms of Euro, Sterling, Swiss Franc as well as Japanese Yen. The US economy in fact is leading towards a double dip recession.

The impressive performance in the external accounts is being attributed to the pro-active management of foreign exchange market and to the upshot of purchases from the inter-bank market by the State Bank of Pakistan, combined with the wide-ranging structural reforms that were initiated and enforced by the government during th last about three years, but the point which merits consideration, is that while such a strategy has brought about a revolutionary change in the external sector, the internal economy or the real economy is still struggling for revival.

The growth rate was estimated during last FY at 3.6 per cent the trade deficit stood at $1.2 billion or 21 per cent, fiscal deficit was recorded at 5 per cent. Meanwhile the total investment declined from 16 per cent to 13.9 per cent of GDP and the rate of unemployment moved to about 7 per cent.

It is due to this anomalous situation that a school of thought terms the improvement in the external account, to the non-economic factors and the generosity of our donors and assistance by world financial institutions. Without entering into this controversy, the fact remains that the government’s over-riding emphasis must now shift towards growth, stemming from accelerated investment, larger production and higher exports, because only such a strategy would prove enduring, viable and a real source of export promotion and resultant rupee-stability. The export growth through the device of exchange rate, would indeed prove counter-productive, in the long-term, through upward revision of import prices of raw material, chemical, machinery etc. and consequential escalation in the cost of production of export-oriented industries. A strong dollar does not necessarily mean to fetch more export orders due to diminished prices.

It is a happy augury that the process of economic recovery, both in Pakistan as well as in the international economies, are discernible. The intensity and severity that has adversely impacted on the economy in the wake of aftermath of September 11, Afghan War and the stand-off at India-Pak border, has started de-escalating. At the same time, some of the provisions of the federal budget are investment-friendly and the Trade Policy envisages some export-boosting measures.

The facility of tariff-free access and upward revision of quota in the EU countries, along with some relaxation in quota by the USA as well as the recent Free Trade Agreement (FTA) with Sri Lanka and trade promotion agreement with Bangladesh, etc would strengthen the export-promotion drive. Meanwhile, barring the USA, the process of economic recovery in European Union and Japan has already started. The exports, which fetched $816 million in July this year, as compared to $684 million of the preceding year, depicting a significant rise of 19.3 per cent set a pace towards export expansion. In all probability, therefore, the export during the current year would accomplish the target of $ 10.4 billion, without finding recourse to a depreciated rupee, through a deliberate policy.