LAHORE, Dec 11: A former finance minister in the cabinet of the exiled prime minister Nawaz Sharif on Monday lent support to the central bank on its stern stance on the exchange rate, saying the “current policy of slow and gradual minor adjustment of the rupee (as determined by the market) against the greenback is correct to protect the economy.
Speaking to reporters at the inauguration of a 4-day training workshop for economic journalists, former minister Sartaj Aziz said a sudden 10 per cent devaluation would not help shore up the country’s exports. Nevertheless, he said, it was critical for the government to take other measures to boost the country’s exports and reduce exporters’ cost of doing business as well as improve productivity in order to make them competitive in the global market.He conceded that if domestic inflation was higher than the global inflation rate, the exports suffered. But he categorically opposed the idea of a major devaluation of the local currency.
According to him, Pakistan’s competitiveness in the European and Japanese markets had improved over the last 3-4 years as the rupee had depreciated by around 40 per cent against euro and yen over the same period.
It may be recalled that central bank Governor Dr Shamshad Akhtar had called a press conference on Sunday, a day before the opening of the country’s stock markets, to quash speculation that the government was facing pressures from the International Monetary Fund (IMF) to devalue the rupee by 10 per cent or it intended to re-adjust the currency in the near future as was being speculated for some time now.
Mr Aziz said the key risk to the country’s economic stability stemmed from the widening gap in the balance of trade, which was around $12 billion in FY06 and had the potential to increase the current account deficit in future.
“Though the widening balance of trade gap has so far not enlarged the current account deficit, which the government has been financing through the workers’ remittances of around $4 billion, privatization proceeds, and other foreign loans of about $2 billion to hold it down, there are chances that it could explode if exports go down and imports surge,” he warned.
During the current fiscal year, he pointed out, the imports had been curtailed as compared to last year. However, he added, exports had also decelerated in the same period. It was mainly because Pakistan was stuck into low value-added exports and failed to increase exportable surplus as well as diversify exports and markets.
He underscored the need for supporting the engineering, electronics, and chemicals industries in order to diversify exports.
A central bank spokesman had also sought to explain that the “State Bank computations indicate that there is no fundamental misalignment of the real effective exchange rate of the rupee and, therefore, consistent with recent trends, the exchange rate will remain stable in the inter-bank market.
Meanwhile, Pakistan Readymade Garments Manufacturers and Exporters Association (Prgmea) chairman Ijaz Khokhar has also supported Dr Akhtar’s stance on exchange rate, saying devaluation of the rupee would increase the prices of machinery spares and petrochemical products, which in turn would increase transportation charges and accessories used in garments for value addition.
“This will raise the cost of production as well as labour charges, affecting exports and the already dwindling foreign exchange earnings,” he said.