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Devaluation and export promotion.


Export is called the engine of economic growth. The advantages from export are manifold. First of all, it enables a country like Pakistan to exchange low skill export for skill, technology and capital intensive import. Secondly trade is a major source of 'transfer of technology and ideas. Production processes and products are invariably changing in the course of economic development as the growth of electronics industry in the recent past clearly shows. Thirdly, reliance in export inevitably keeps efficiency and competitive edge in the forefront of the industrial managers.

The recent emergence of four Asian tigers namely Korea, Hong Kong, Singapore and Taiwan owes to the dependence on export which has helped accelerate the pace of economic growth through restructuring the economy to the demand of the overseas buyers. The Export/GNP ratio in these countries now exceeds 30 per cent. This fact has brought these countries to the forefront among the developing countries.

Characteristics of Pakistan's Exports

Pakistan's export forms only 0.16 per cent of world's total export as its share in GNP is only 14 per cent. In other words, export in Pakistan has not assumed the importance it should attain if it has to emerge as a middle income country of the world.

One of the main characteristics of Pakistan's exports is the dependence on a few selected items. For instance, cotton and cotton manufactures alone form 57 per cent of total exports. This narrow base and lack of diversification of exports have made the country vulnerable to external as well as internal shocks as happened during the last financial year in respect of short cotton crop. Available data, however, indicate that between 1980 and 1989, Pakistan diversification index has improved but only marginally from 0.777 to 0.846.

Another feature of Pakistan's exports is heavy dependence upon low value added items such as rice, raw cotton, cotton yarn, fish, fruits and vegetables which together constitute about one-third in terms of value of export. Primary commodities and semimanufactures which include hosiery and bedwear formed 40 per cent of total exports in 1991-92. Although their share has fallen over the period from say 48 per cent in 1981-82, nonetheless they yet form a substantial part of our export earnings. The share of high value added, non-traditional items like engineering goods and chemicals which are price and income-elastic is still insignificant. The significance of high value added items is that their terms of trade is less unfavourable and would thus help arrest the deterioration in overall terms of trade over time.

An interesting feature of Pakistan's exports is that small scale industries make greater contribution than large ones. A look at the manufactured goods that are exported such as hosiery, towel, ready made garments, surgical goods, cutlery, sport goods, leather goods and carpets, reveals that these are produced on a small scale. It is ironic that large scale industries including those in the public sector make no or little contribution toward foreign exchange earnings.

Another characteristic feature of Pakistan's export is the reliance on selected overseas markets. Export to only seven countries namely USA, Japan, UK, Germany, Hong Kong, UAE and Saudi Arabia constitutes 51 per cent of total exports. The whole African continent is a meagre 4 per cent. Central and South America form less than 1 per cent. Even export to OIC countries constitutes only 15 per cent. The concentration of market is also an unfavourable phenomenon which calls for greater effort to diversify our exports. The exploration of new markets, therefore, remains one of the principal goals for policy makers as well as exporters.

A notable feature of our trade is that manufactured goods exports have increased at a rapid pace and that is why total exports have recorded relatively fast increase in recent years. During ten-year period ending 1991-92, manufactured goods exports rose at an annual rate of 22 per cent compared to 20 per cent rise in total exports (in rupee terms). As a result, the share of manufactured goods exports rose from 52 per cent to 60 per cent. The share of exports of manufactured goods in total value added of industrial sector jumped from 31 per cent to 55 per cent over the corresponding period. More notably, manufactured goods exports have reflected buoyancy over the last couple of years because of liberal economic policies of the previous Government. Between 1989-90 and 1991-92, the growth has been at the rate of 31 per cent per annum compared to 27 per cent in the case of total exports.

Export of manufactured goods depends upon the availability of raw materials, access to credit facilities particularly short-term, zero or low duty import of raw materials, machinery and spare parts, income tax exemption, liberal import of items for export oriented industries, etc. All these factors have contributed to the expansion in export of manufactured goods in recent years.

Of late, gross fixed capital formation in manufacturing sector has witnessed significant rise. It jumped from Rs. 39 billion in 1990-91 to Rs. 58 billion in 1991-92 and to Rs. 59 billion in 1992-93, reflecting annual rate of increase of 23 per cent. Allowing for average inflation rate of 10 per cent, the real growth in investment is 13 per cent per annum which is quite respectable thanks to the liberal economic policies pursued over the couple of years. Manufactured goods export is likely to rise with the expansion in the production capacity in the coming years.

Needs to Expand Export

In principle, export proceeds should match import requirements over the period but it normally does not happen. In Pakistan, export proceeds fall far short of import requirements, and as a result, the gap is met principally by workers' remittances and foreign economic assistance. Although the annual rate of growth of export proceeds (at 10% in US dollar terms) has been higher than that of imports (at 6%) over the ten-year period ending 1992-93, nonetheless, the gap remains high at US$ 2.5 billion during 1992-93. The problem is that over the period the workers' remittances have been reduced to almost half from US$ 2.9 billion to US$ 1.5 billion. This reduction has forced the present Government to take measures for promoting exports as well as to check the growth of imports. Foreign assistance cannot be taken for granted as it eventually results in reverse flow because of interest and debt repayment. Moreover, the "aid" donors are now reluctant to provide economic assistance to developing countries in general because of prevailing recession and unemployment there.

The trade deficit will continue to pose serious challenge to policy framers in future because of falling remittances and net transfers from abroad. Given this situation, either import will have to be controlled or export promoted with utmost rigour. It should be noted here that any stagnation in import will adversely affect the performance of the industrial sector as it is heavily dependent upon imported raw materials, machinery and spare parts which in turn will have adverse consequences on exports of manufactured goods. The import component among different industrial subsectors varies between 1.5 per cent (in cement) and 80.8 per cent (in petroleum products). The recent buoyancy in exports of manufactured goods was partly triggered by liberal import policy. Thus, exports are, to a significant extent, linked with imports.


Devaluation has been considered as an important instrument for promoting export by the developing countries including Pakistan. The present exchange rate between Pakistani Rupee and world major currencies is set through a managed float system which was introduced on 8th January 1982. Under this system, the US dollar is used as intervention currency to determine rates with a basket of other currencies. The value of Pakistani Rupee has over the period (January 1982 - August 1993) declined by 67 per cent from Rs. 9.90 to Rs. 30 per US dollar.

The value of Pakistani Rupee is quoted daily by the State Bank of Pakistan and every now and then the value of Rupee visa-vis US dollar is reduced by 5 or 10 paisa. This creeping devaluation is intended to promote export through making Pakistani products competitive in the world. In the writer's opinion, persistent devaluation is worse than one-time devaluation, as it reflects the softness of the currency.

In last July, the Rupee was devalued by a massive 10 per cent because of the persistent demand of spinners who were facing stiff competition from India and China which have last year devalued their currencies in a bid to promote exports. One has to examine the pros and cons of devaluation in its impact upon exports.

The advantages of devaluation are transitory or of short term nature as it results in rise in quantity exported as well as in customs revenues, because of fall in the value of domestic currency. But the disadvantages are enormous. Devaluation raises the import cost and, therefore, breeds inflation. In Pakistan, the import component is very high as mentioned above and therefore the cost of production will rise. In the long run, the edge of cheapness withers away because of the full impact of devaluation being absorbed by the economy. In addition, the value of repayment of foreign loans and interests rises in terms of domestic currency.

Devaluation is no panacea for problems confronting Pakistan like other developing countries. Pakistan must introduce structural changes in the economy to produce quality products at competitive prices. The devaluation can be helpful only if the exportable products are price elastic. In other words, the percentage increase in export should be more than the percentage of devaluation. Take the case of recent 10 per cent devaluation of Rupee. If the quantity of goods exported rises by less than 10 per cent, the export proceeds will decline. The export proceeds will rise to the extent goods exported rises in excess of 10 per cent. In our case as demand of most of the exported items is inelastic in nature, foreign exchange earnings are not likely to rise.

During 1992-93, FOB exports were estimated at over US$ 7 billion. At the original pegged rate of Rs. 9.90 per US dollar, the export proceeds during the year would have been over US$ 18 billion. The consequences of depreciation of rupee can thus be seen.

Policy Recommendations

In order to compete in the overseas markets, productivity will have to be raised so that Pakistani products could be competitive. If the productivity is high, the price will be low. Our industrialists, instead of reducing cost or raising productivity through improved practices like automation and indigenization of imported technology, demand concessions from the Government in terms of devaluation as well as soft loans and mark ups as recently witnessed.

The tendency in Pakistan is that after an entrepreneur sets up industrial plant, he looks to the local demand first and then to the overseas market. In fact, the strategy should be the reverse, that is, to first of all look at the overseas demand and then take the final decision.

Pakistan has reached a stage of economic growth where further acceleration cannot be guaranteed without breakthrough in exports. Pakistan must give up the introspective, import substitution strategy of 1950's and 1960's in favour of extrovert, export orientation approach for 1990's and beyond. Only such a strategy could catapult it successfully to the 21st century. In this connection, Pakistan should emulate the experiences of Malaysia, Thailand and Philippines, let alone four Asian tigers.

Of late, Export Promotion Bureau, an attached Department of the Ministry of Commerce, Government of Pakistan, has been active and taken several steps like holding seminars, attending exhibitions abroad, sending trade missions overseas and tendering advice to exporters. The Bureau has been discussing with trade officials of USA and EC on quotas and tariffs imposed by these countries. It has engendered enthusiasm and interest among exporters. It has exposed our exporters to the latest designs and standards of goods produced in Korea, Japan and Germany. But more needs to be done in terms of consultancy and advisory services being rendered to the private sector.

The role of the public sector has to be of a catalyst by providing ways and means to the private sector in connection with export promotion. The former should not indulge in trading activities itself. The recent policies of the Government are in the right direction.

On the part of the private sector, the incentives or concessions provided by the Government should not be treated as a means of making undue profit through malpractices. Instead, it has to operate on a lower margin of profit and expand the volume of exports in the hitherto unexplored markets.

It would be appropriate to mention here that engineering goods are very small component in total exports despite billions of rupees invested in engineering units particularly in the public sector. Most of these units are large and a substantial portion of capacity is lying unutilized. Mechanism should be devised through private sector collaboration to expand the exports of these engineering units to the less developed countries. India is already undertaking turnkey projects in Asian and African countries.

Pakistan must aim at the export target of 20 per cent of GNP by 1994-95 and at 30 per cent or beyond by year 2000 if it has to enter into the rank of middle income countries of the world in the beginning of the 21st century. Only achieving such a target can enable Pakistan to eliminate the present trade gap and reduce the dependence upon workers' remittances or foreign loans. In order to attain this target, as pointed out above, devaluation is not desirable as it has more unfavourable impact upon the economy and fails to promote exports in the long run. A robust and buoyant economy need not devalue its currency for promoting exports but, for this, structural changes will have to be introduced which will expose our industries to more competition and less dependent upon protection, tilted towards the domestic market. In such a case, productivity will rise.

An alternative to devaluation is complete convertibility of the currency if the foreign exchange reserve position permits, a proposal recently suggested by the Federation of Chambers of Commerce and Industry. The exporters need not surrender import proceeds to the State Bank of Pakistan and the importers would purchase foreign exchange from them.
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Author:Asad, Hasan
Publication:Economic Review
Date:Sep 1, 1993
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