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Should Pakistan devalue its currency.

Should Pakistan Devalue its Currency

Thanks to the sharp depreciation of Pakistan rupee over the last few years, Pakistan has been able to achieve a major success in the export field. This is in fact the most significant positive aspect of our economy that despite adversities, particularly the Gulf war, Pakistan's exports touched the high water-mark of over $ 6 billion last year. Drawing strength and inspiration from this performance, the government has fixed as export target of $ 8 billion for the current fiscal year and $ 10 billion in the next two years. The emerging situation, however, casts serious doubts about the prospects of achieving such an ambitious target. The devaluation of the Indian rupee by 22 per cent with the strong indication of further depreciation, a wave shock is seeping through the business circles which feel that it will sharply erode Pakistan's competitive edge in foreign markets rendering its cotton, cotton yarn, textiles, cloth made-ups, garments, leather goods, carpets and rice incompetitive. Pakistan was already facing tough competition from India which was boosting its exports through various bonus schemes.

With 26.05 Indian rupees to a dollar as against 24.50 Pakistani rupees, India may elbow Pakistan out of the export market. Its indication has already been given by a surge in the share prices of Indian companies dealing in coffee, tea, cotton textiles, leather goods etc. on the Bombay Stock Exchange. Thus there is strong likelihood of India stealing a march over Pakistan in the markets of USA, Europe and Japan. No wonder therefore that Pakistani businessmen feel that things have gone topsyturvy in the wake of the devaluation of the Indian rupee and the export bias of the trade policy has become irrelevant in this context.

Federal Finance Minister Sartaj Aziz has said that Pakistan was not caught napping by massive devaluation of the Indian rupee as committee headed by the State Bank Governor had already been watching developments. This committee is supposed to recommend measures to counter the impact of Indian devaluation on Pakistani exports.

Mr. Sartaj Aziz has admitted that Indian goods were already highly competitive in the world market as the Indians had provided export rebates to neutralise the effects of a dearer rupee. He said that in case of Indians withdraw the rebates after the devaluation of the Indian rupee, Pakistan need not worry. If the rebates are continued, some counter measures will have to be taken by Pakistan. These measures may mean offer of rebates to the exporters of across the board devaluation of the rupee.

However, since the Indian devaluation has been carried out under pressure from the IMF, the world agency would not like to trigger exchange war among the countries of the region. According to some economic experts the need for the devaluation of the Pakistan rupee would not arise as Indian export list mainly comprises traditional export items which have a rather realistic demand. Hence it cannot be readily presumed that devaluation will automatically boost Indian exports. Indian rupee had taken a steady downhill course since 1981 but its share in world trade did not record any sizeable growth. Thus the Indian devaluation does not pose a serious threat to Pakistan's exports. Pakistan has the mechanism of managed float to readjust the exchange rate of its rupee which can always come in handy. This largely obviates the need of devaluation of the Pakistani rupee as it would unleash a virulent wave of inflation, raise the import cost of machinery and raw materials and enhance the debt servicing burden exorbitantly. There has been expansion of Indian exports in an era of increase in world trade. This is an absolutely exogenous factor and cannot be related with exchange rate change.

The experts maintain that the recent Indian devaluation may increase the import cost of items like petroleum and petroleum products while India has already an annual debt servicing liability of about 40 billion rupees which will go up to 44 billion rupees after devaluation. Taking all these aspects into account, it can be said that India is going to take a series of follow-up measures aimed at liberalisation and deregulation. It may include removal of internal controls, relaxation of restrictions on imports and exports etc. It goes without saying that devaluation is not an end in itself. It cannot achieve the desired objectives unless it is accompanied by simplication of rules in respect of imposition of excise and customs duties. Moreover, there should be greater freedom to import technology as well as facilities for foreign investments. Happily Pakistan has already significant steps towards liberalisation of the economy through relaxation of exchange controls, investment incentives, privatisation process and deregulation effort. Its currency has already found its realistic level under the managed float and its parity keeps changing according to the trends in the world money market.

Hence there is no need to panic over the devaluation of the Indian rupee but the fact remains that lowering of the value of the Indian rupee, an indirect subsidy to its exports, may create problems for Pakistan in the export market by offering tough competition to its agricultural and manufactured exports. It clearly underscores the need for careful monitoring of prices of our competitive goods in the foreign markets. Accordingly, appropriate measures can be taken.

It is gratifying to note that Pakistan is quite alive to the situation. Presently Pakistan has no plan of any devaluation of Pakistan currency, says Finance Minister Sartaj Aziz. it is for the first time after 1949 that the value of Pakistan rupee was more than that of India. Leading industrialists maintain that the devaluation of Indian currency would have no immediate effect on Pakistan currency. However, the need for constant vigilance in the export market can hardly be overemphasised. The biggest item which might be affected is textile. But this fact will have to be kept in view that textile is the plural of cotton, thread, ready-made garments and cloth. India neither exports cotton nor thread. As far as cloth is concerned, Pakistani cloth is exported under quota. So the competition will become tough only in non-quota items. Competition will also be very serious in towels and leather products.

Pakistan can draw some consolation from the fact that while heavily devaluing its rupee, India has reduced some of its subsidies and export incentives. Still majority of Pakistani exporters fear unfair competition from the cheaper Indian rupee and have already started demanding compensatory measures. Some independent economists apprehend a chain of competitive devaluations in South Asia. Some countries may come up with new export incentives from which India is likely to snatch exports.

There are unconfirmed reports that there has been sharp erosion of the value of the Pakistani rupee in the wake of the liberalisation of exchange regulations and a dollar is fetching Rs. 30 in the black market, a proposal for a 15 per cent devaluation is under active consideration of decision-makers. The pro-devaluation lobby maintains that the devaluation of the Indian rupee, suspension of US aid and world trading environment underscore the need for checking unbridled imports and boosting exports. This would not only help improve balance of payments position but will also ensure internal stability. These circles argue that the Indian devaluation poses a serious threat to our exports. If the ambitious export target for the next two years is to be achieved Pakistan will also have to follow suit. Cotton products and rice are the country's two major exports and it is in these fields that India would like to elbow us out in the foreign market.

However, as already said, there is a strong case against devaluation and most of the Pakistani businessmen and economists are not in its favour. There is consensus among them that its demerits outweigh the merits. They cite the example of the savage devaluation of 1972 which gave serious jolt to the economy by raising the country's debt servicing liability sky high in rupee terms. Since the country's exports mainly consisted of traditional items for which there was an inelastic demand in the world market, there was not much expansion in exports. On the contrary, the import cost of machinery and equipment increased manifold giving a serious setback to industrialisation process. The debt liability of the industrialists who had taken foreign exchange loans from DFIs increased tremendously as a result of which a large number of them became sick. The inflationary pressure at home was exacerbated to the grave detriment of the common man and the unemployment problem assumed alarming proportions.

Against this backdrop, anti-devaluation lobby argues that devaluation will sharply erode the confidence of the private sector which is building up in the country. Since the rupee has already been floated and its exchange parity is determined by the law of supply and demand, there is no need for devaluation. Even politically, it will be an unwise step as it will demonstrate the weakness of IJI government. It is already beset with a host of problems such as law and order situation.

Hence at this stage, devaluation of Pakistan rupee appears to be a remote possibility. Economic liberalisation and privatisation process have evoked a good response from foreign investors and some 200 million dollars are expected to be mobilised through three Pakistan Funds floated abroad to raise money for investment in shares and securities in Pakistan. This process will receive a setback if devaluation is resorted as it would greatly enhance the cost of industrialisation. Both foreign and local investors will become shy and the entire purpose of the new policy package will be defeated.

The dollar's new-found strength after the Gulf war is largely responsible for the sharp decline in the value of the rupee. The rapid expansion in the supply of money has also partly been responsible for this. In this scenario, whether devaluation will help or not is a big question mark. However, a section of economists believes that devaluation can go a considerable way in improving things. These sources say that although the IJI government is convinced of its merits, it is dragging its feet on devaluation issue mainly because it will be a suicidal step.

The float system has been working efficiently for the past many years to the full satisfaction of the World Bank and IMF. Hence there has been no pressure from these two agencies dollar since its delinking from the US currency in January 1982, the rupee has already devalued by about 150 per cent over the last 9/1-2 years or so. A drastic cut would cause a panic. Rupee-dollar parity readjustment is a continuing process which can meet any exigency.
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Author:Jabir, Rafique
Publication:Economic Review
Date:Aug 1, 1991
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