Devaluation fuelling inflation

October 22, 2021

LAHORE: Declining currency value is a new normal in Pakistan these days, and a major cause of price hike, inflation and higher fiscal deficit.The notion that devaluation increases exports is not...

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LAHORE: Declining currency value is a new normal in Pakistan these days, and a major cause of price hike, inflation and higher fiscal deficit.

The notion that devaluation increases exports is not true. Pakistani exports have never responded to depreciation of currency. Even in recent cases, exports remained stagnant or declined during the first two years of this regime as rupee nosedived from Rs118 against the dollar to Rs165.

Exports started increasing and rupee gradually appreciated to Rs155, after Pakistan’s economy opened earlier than the regional economies. However, one much not forget that the exports were also facilitated by various subsidies that the state granted in power, energy and markup.

Exports registered increase during the period when rupee after appreciation to Rs155 stayed stable for a year.

The decline in rupee value in the last four months did not trigger faster exports.

Way back in 2009, Advisor to then Prime Minister on Finance, Shaukat Tarin insisted that devaluation increases exports, but that claim was proven wrong. It may be a coincidence that rupee decline accelerated when the same person heads the ministry of finance in the PTI regime.

Perhaps his views on the benefits of devaluation have not changed. A peek into the past reveals that Pakistani exports have historically stagnated after devaluation and have registered a healthy increase when the rupee is stable, which also attracts higher foreign direct investment.

Prior to the current run-on rupee, the most massive devaluations were made during the decade of 1990 when the local unit devalued from Rs27/dollar to Rs54/dollar by the time the Nawaz government was deposed in October 1999.

Despite this massive devaluation during the decade, exports only slightly inched up in 10 years from around $7 billion in 1990-91 to $8.1 billion in 1999-2000. Exports started picking up after 2002-03 as the rupee moved towards stability.

On June 22, 2001 the rupee was valued at Rs66.69 against the dollar, and Pakistan’s exports in 2001-02 were $9,140 million. The rupee appreciated against the greenback next year, and by June 22, 2002 the dollar was valued at Rs60.24. The appreciation of rupee did not impact exports that rose to Rs10.88 billion in 2002-03.

The value of rupee increased again next year and on June 22, 2003. The dollar was valued at Rs57.80. In 2003-04 however exports rose to $12.396 billion.

Following that, in 2004-05, the dollar remained stable against the rupee, valuing at Rs57.90; however, the exports continued rising and reached $14.482 billion. The rupee depreciated by less than five percent in 2005 valuing at Rs59.76 on June 22, 2005. The exports from Pakistan increased to $16.55 billion in 2005-06.

Domestic currency remained stable the next year too, with its value at Rs59.98 against the dollar on June 22, 2006. The exports from Pakistan rose to Rs17.27 billion in 2006-07.

In 2007-08, dollar value increased to Rs60.77, while exports amounted to $20.42 billion. In 2008, the value of the dollar on June 22 was Rs67.51 and by the second quarter of that fiscal year it crossed Rs80, to touch Rs81.28.

The exports during 2008-09 were $2 billion less than the previous year. The rupee showed some stability in the remaining tenure of PPP in 2012-13, and exports rose above $25 billion. This was despite the fact that the devaluation was massive.

During the PML-N regime, the rupee remained stable, but the government withdrew most of the subsidies. The subsidy addicted export sectors suffered and the exports gradually declined.

Exports increased to $24 billion in 2017-18 when the exporters realised that they would have to improve efficiencies instead of depending on government dole outs.

The present regime announced various subsidy measures to boost exports. The rupee was already massively devalued. But after two years, the exports were down to $20 billion.

In the third-year exports registered a massive increase due to the stable rupee. The surge in exports sobered out after the rupee started declining again.

Devaluation has also increased the debt servicing burden of foreign loans. A decline of rupee one in dollar value, adds 116 billion to the foreign debt in rupee terms.

The decline of Rs18 in rupee value against the dollar has increased the foreign debt in rupee terms over Rs2 trillion. This has massively increased the debt servicing cost.

A year back, we serviced our foreign debt at Rs155/dollar and now at Rs173; there is no end in sight. Foreign investors, who invested when the rupee was stable are also in a fix.

Now they have to earn 12-5 percent more on their investment to remit the same amount of dollars that they used to send as their profit about three years back. This is the reason for the increase in rates of products marketed by the multinational corporations.

Since Pakistan is an importer of commodities like crude oil, edible oil, industrial raw materials, and chemicals; and a major chunk of its imports are almost double than its exports, the depreciation of rupee also fuels inflation in the country.

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