ISLAMABAD, May 1: Exports would have touched $20 billion mark by the end of June 2007 and trade deficit reduced by $5 billion, had the government gradually depreciated rupee against dollar six months ago, said a report conducted by independent economists.
Since the decision has not been taken at that time, the trade deficit is now estimated to climb to $13.9 billion by end of June next with exports at $17.2 billion and import bill at $31.18 billion during the period under review.
The government, however, was reluctant to take such a step for obvious reasons as it would lose a handsome amount in the shape of revenue.
The Central Board of Revenue (CBR) raises more than 46 per cent of its total revenue from imports.
The study revealed that with the 10 per cent devaluation, it was estimated that export value would grow by $2.041 billion, import bill would reduce by $2.418 billion. The accumulative impact on trade deficit would be over $4.5 billion.
Hence the exchange rate of the rupee will rise to Rs67.1 to a dollar from Rs61. However, the external debt liability in rupee term would increase by Rs231.8 billion. The next increase in the budget expenditure would be around Rs30.739 billion after the devaluation, the study revealed.
The lack of pressure on rupee currently is anomalous. It is due to non-recurring foreign exchange flows in the inter-bank market, and, therefore, not sustainable.
When these flows are no longer there, rupee will be under pressure.
The rupee slide would also enhance the country’s external debt liability in rupee term. However, it would remain the same in dollar term.
An official source in the finance ministry told Dawn that the tussle on the extent of over-valuation of rupee was mainly on methodology, weights used and time period of comparison.
He said the results are also different according to the selection of these indicators.
The State Bank of Pakistan (SBP) considered the rupee over-valued by 2-4 per cent compared with July 2002 by end of June 2006, IMF considered the rupee overvalue by 10 per cent and the World Bank estimated the over-valuation at 17.5 per cent.
Based on a series of background interviews with some economists and insiders in the finance ministry, the rupee is over-valued in the range of eight to 10 per cent compared with inflation abroad — US 3-4 per cent and EU 2-2.5 per cent -- due to lack of timely adjustments in response to market forces, exchange rate of Pakistani rupee is biased against growth of exports making them expensive.
They said the large trade deficit is partly the result of macro policy focus on growth, fiscal deficit and debt, which makes export expensive and imports cheaper, hurt industrial investment and trade competitiveness.
Indirectly, the policy focus has led to inflation and over-valuation of rupee, reinforcing the foregoing phenomenon.
The slide in rupee would also result into pushing up inflation as prices of imported goods would witness upward trend besides an increase in the budgetary expenditure.
For controlling this, the SBP would have to further tighten the monetary policy besides government would have to mobilise their resources for meeting the rising expenditure.
Some analysts said it could also be achieved by cutting the questionable PSDP projects, unjustified subsidies and wasteful current expenditure.
Rupee slide could be achieved by SBP intervention in the market to buy dollars, which would result in the increase of SBP reserves and subsequently using such enhanced reserves to sell dollars in the market when increasing demand of foreign exchange puts pressure on the Pakistani rupee.
The seven to eight per cent per annum GDP growth can only be sustained through a 20 to 25 per cent per annum growth in exports.
Even if exports in textiles and clothing sector continue to grow more than the international average, a formidable challenge, such an export growth rate could not be achieved unless the export growth in non-textile sector is accelerated in
Pakistan.
The current account deficit is growing and reaching unsustainable levels and is being financed through inappropriately by using FDI in services sector, privatisation proceeds, portfolio investment and GDR issues.
This deficit will rise when Pakistan runs out of selling public assets.
In addition to maintaining high level of GDP growth, the management of trade deficit, which includes growth in exports and reduction in imports, is also required to provide a sustainable mechanism to reduce the current deficit.
The key element to achieve sustainable and rapid export growth would be to address the issues of export competitiveness.
A realistic exchange rate is also required to achieve export growth. Such policies have been followed by many East Asian tigers in their earlier years of export and even today by China.