Published Date: Oct 27, 2016
Exchange (rate) calls for change
A year after the IMF forced the government to shelve its plans of doling out a textile package for boosting the sector’s overseas sales, the government is now pondering over an exports package of about Rs120 billion to Rs180 billion, a bulk of which is due to be allocated to the textile sector.
Reportedly, the plan is aimed at reducing the cost of doing business and making export-oriented sectors competitive with other regional countries. As if that’s how economies are reformed and exports given a boost elsewhere across the globe.
These packages often reek of one-way capitalism and are mostly a drain on fiscal kitty. They are also a reflection of patronage politics, which is what PML-N will have to increasingly resort to as 2018 elections draw closer in a political environment that is becoming hostile by the day (See BR Research column: Packaged-based economic mismanagement, October 16, 2015).
Had the government been really serious about boosting exports, it would have woken up to the reality when it took office or a year after at the most. Reforms are like Rome; they are never built in a day. Because the government failed to take charge when it should have, it is now thinking of doling out a package to make do; like an inexperienced housewife who burns the cake, but insists on putting cream and cherry on the top to shine her skills. Let this be very clear: although sources say that the Jupiter of all ministries in Pakistan, Ishaq Dar, will eventually block this exports package proposal; in case he doesn’t, the package should not be seen as a sign of PML-N’s benevolence or economic wisdom, but as a sign of a governance failure.
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If the government is indeed serious about taking the bull by the horns, it should lend ears to the latest research coming out of the Sustainable Development Policy Institute (SDPI). Written mainly by Sajid Amin, Head of Policy Solutions Lab at the SDPI, the study looks at decades of Pakistan’s exchange rate history and arrives at the following summarised conclusion.
"Pakistan performed better in periods of undervalued exchange rate than with an overvalued currency. The average growth rate of real GDP is higher in periods of undervalued rupee as compared to the episodes of an overvaluation. Similarly, highest growth for exports is documented in the periods when rupee was undervalued," wrote Amin in his policy brief titled: "Political Economy of Exchange Rate Misalignment: A Synthesis of Lessons for Pakistan".
Amin is not the first one to argue in favour of letting the market find the currency’s value, or letting it depreciate to a level where at least it doesn’t kill exports; growth is another matter. The arguments have been floating for some time; it is just that the government fails to bite it.
As early as in February 2015, ADB’s country director stressed that Pakistan’s "exchange rate is currently overvalued". "It would help Pakistan if the exchange rate was perhaps a bit lower. Whether it is a 110 to the dollar or 115, one can hypothesize about it," he told BR Research in an interview published on February 16, 2015 in this paper’s Brief Recording section.
Earlier this year, the boss of TDAP, SM Muneer echoed those views. "Pakistan should already let its currency depreciate; the PKR should be at least 110 to the dollar at present. Any delay in that is only hurting the country’s exports by the day," said Muneer in an interview with BR Research published on February 1, 2016.
More recently, the IMF in its latest review highlighted that "pronounced real appreciation of the rupee over the program period …."has negatively affected [Pakistan’s] trade competitiveness". "Continued appreciation of the real effective exchange rate, in the context of an appreciating U.S. dollar vis-a-vis the pound and euro, would further erode export competitiveness and affect remittances," it cautioned.
Yet the growth in exports continues to be slaughtered at the altar of Dar’s ego, and the public misperception that a strong rupee necessarily reflects a strong economy.
Problems of ego are difficult to fix, but the misperception will hopefully be cleared as and when the civil society raises enough voice about it and the mainstream electronic media decides to mediate that voice for a change. Until that time, best order a tombstone for Pakistani exports and brood over a fitting epitaph.