WHEN a country has a strong economy that is reflected in the strength of its currency. And intrinsic worth of the currency is reflected in its domestic and external purchasing power and its stable external value.
Of course, an developed country like the US may choose to let the exchange value of its currency go down to help its exports compete with those of China. That does not mean that the US economy is weak but America does face external trade challenges.
Otherwise, countries do want their currencies to mirror their economic strength and stability, particularly to attract large foreign investment. But in Pakistan’s case, it has a long history of the devaluation of the rupee and then floating it down further bit by bit.
Hence the exchange rate of the rupee has come down from 3.35 to above 60 to a dollar over 53 years. Compared to that the dollar in India costs Rs46.1 after it has gone down by Rs2.6 to a dollar within a year.
Compared to that the Pakistani rupee is more steady in recent times as it lost Rs0.6 for a dollar last year.
Of course, the Sri Lankan rupee and the Bangladesh Taka are weaker than the Pakistani rupee because of unsettled conditions there. And Sri Lanka’s cheaper currency helps to attract more tourists. Pakistan does not have any such comparative advantage in devaluing the rupee.
Between 1985 when the rupee was 16 to a dollar and 1988 when it was Rs18.1 to a dollar the devaluation was very slow. Since then the devaluation has been stepped up and in the year 2001-02 it came down to over Rs64 to a dollar from July to September.
Instead of the periodic formal devaluation of the rupee, it was allowed to float down according to the market conditions. And after 9/11 as the demand for dollars declined and the inflow for greenback from abroad increased, the dollar at home came down to hover under Rs60.
Of course, the dollar lost heavily against the euro and partly against the Japanese yen. So there was no need for a falling rupee to go down along with the US currency.
But now the demand for the devaluation of the rupee has surfaced again from exporters, particularly the textile industry as the country has not been able to meet its modest export target of $17 billion in the last fiscal year; so the industry has made a formal demand for devaluation of the rupee along with calling for a packet of fiscal and monetary concessions.
As far as the people are concerned devaluation is unpopular, particularly among those who have visited India recently and seen the stronger purchasing power of the rupee.
Devaluation of the rupee is a double-edged weapon. If it helps at one end, it hurts deeply at the other. And once we are on it, it can become a roller coaster with very little control over that.
To begin with devaluation makes all imports more costly, particularly now when the world price of oil earlier in the week went up to $74 a barrel in the US. And devaluation enhances the import duties and sales tax on all imports as they are based on the rupee value of the imports.
And it will enhance the production of all locally-manufactured goods based on imported raw materials as well as other imported inputs.
The prices of locally-produced oil and gas will go up as they are linked to the international price of oil by agreement with their companies.
The foreign debt will go up in terms of rupee and the cost of servicing those loans will also rise as the government first of all mobilises rupee resources to service the loans and then converts them into foreign exchange.
Foreign travel, foreign studies and keeping embassies abroad will become far more costly and our rulers will enhance the cost of government a great deal on foreign travels.
And as the process of formal devaluation starts, there will be frequent repetition of the same as in the past. The exporters will find that as the cost of production and exports rise, they will have to demand further devaluation and in the process the economy will get too entangled and one solution sought can be as frustrating as another.
To avoid abrupt devaluation, the floating of the rupee in a free market was considered the right remedy and we have practiced that for long successfully. But now the textile exporters want not a slow floating down of the rupee but a substantial drop in its external value. And once they get that they may ask for more and more. The right solution for the problem and a long- term remedy is a substantial reduction in the real inflation rate which has not been able to achieve.
It has fixed the current fiscal year’s inflation target at 6.5 per cent when the IMF and the World Bank want the inflation rate to be under five per cent or between 3-5 per cent. That can be achieved through a tight monetary policy which may take time to show results, but the World Bank and the IMF have voiced their disappointment with the monetary policy of the State Bank which they want should be more productive.
A reduction in the inflation rate can also be achieved by improving the supply side and the market mechanism with its battery of price inspectors. All possible steps had to be tried and if one fails, another has to be sought. The result has to be sustained low inflation.
And if the supplies are short of the real needs of the country, they may have to be imported, as we are doing in the case of sugar. The needs of the people should be met, the machinations of the hoarders frustrated and the goods enabled to move free.
Sustained low inflation is good politics as well as essential social remedy in a country with a third of the people living below the poverty line of a dollar a day.
The exporters have a real problem with inflation on the rise and interest rates too increasing. But a solution has to be found without making the rupee cheaper and the inflation far worse. So further concentrated efforts are essential to hold down the price level and make more goods available at fair prices.
The government cannot tell the people that the economy is strong but the rupee is weak as the people determine the health of the economy by the price level and not on the basis of statistical indices.