Rupee devaluation will add to foreign debt, not exports

LAHORE: All indications point to the failure of the government announced export package and now the exporters would pressurise the government to devalue the rupee, which history tells has never increased exports. Proponents of depreciation should take cue from the past, when exports failed to take advantage from this measure.

In 1989, the rupee was being traded at Rs27 against the dollar, and the total exports of the country were $7 billion. In 1998-99, when the rupee value was at Rs54, the total exports of Pakistan merely reached $8.5 billion. It means that against 100 percent depreciation of currency, the increase in exports was merely 22 percent.

The exporters got double the amount from each dollar they earned through exports during this period, but it did not result in a corresponding increase in exports in terms of dollars.

The exporters in fact passed on the benefit they got from devaluation to the foreign buyers, retaining their export markets and increasing their profitability without exploiting new markets. In contrast, the exports started picking up after 2002-03 as the rupee moved towards stability.

On June 22, 2001 the rupee was valued Rs69.69 against the dollar, Pakistan’s exports in 2001-02 were $9.140 billion. The rupee appreciated against the green back next year and by June 22, 2002 the dollar was valued Rs60.24. The appreciation of rupee did not impact the exports that rose to Rs10.88 billion in 2002-03.

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

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

In the year that followed, the rupee depicted stability, as its value on June 22, 2006 was Rs59.98 against the dollar. The exports from Pakistan rose to Rs17.27 billion in 2006-07. The dollar value increased to Rs60.77 and the exports in 2007-08 amounted to $20.42 billion.

Currently, the dollar is valued at Rs104 and the exports are almost in the same range.Some experts argue that the rupee remained stable during the tenure of this regime, but the exports declined. They fail to take into account the global economic scenario.

Europe was in turmoil during this period. The demand in the United States was stagnant and the global trade posted negative growth after a long time.

After 2013, the Indian and Chinese currencies depreciated against the US dollar, while the rupee remained relatively stable. Still, the decline in exports from China and India from 2013-16 was much higher than the decline in exports from Pakistan.

This was despite the fact that Pakistan was facing power and energy shortages that did not affect the other three competing economies of the region.

Currency is not the only factor that impact exports. Devaluation is almost always accompanied with increase in inflation, which increases the cost of local inputs and wages.

This is the reason that instead of going up exports have remained stagnant. In order to control inflation and stabilise the currency, the central banks are forced to increase the interest rates.

This further increases the cost of doing business. Since Pakistan is an importer of commodities like crude oil, edible oil, industrial raw materials, and chemicals, and its imports are almost double than its exports, the depreciation of rupee also fuels inflation in the country.

The impact on the consumers would be much higher than the benefits of a meagre increase in exports. The prices of petroleum would jump on any decline in rupee value.

The power rates would increase corresponding to the increase in dollar value.Above all, every rupee one decline in rupee value would add Rs66 billion to our foreign debt and increase the debt service.

We must understand that a decline of even Rs5 per dollar in rupee value would have no impact on exports, but it would add Rs330 billion foreign debts in rupee term and increase inflation to an unmanageable level.

The government should continue with its efforts to stabilise Pakistani rupee, as devaluation increases power and transportation and other input prices, while foreign buyers put pressure on exporters to pass on some benefits of devaluation to them.

This would not bode well for the economy as the local entrepreneurs have the tendency to pass on most of the benefits they get from the state to the foreign buyers.