Losers galore, but no winners in devaluation game

Comment

LAHORE: The strategic or state-intervened currency devaluation almost always comes with an undeniable dilemma especially in Pakistan.

The problem is that it seldom gives exports a corresponding impetus and its impact on imports pushes the local prices disproportionately higher.

The rupee has devalued against the US dollar by around Rs11 or nearly 10.6 percent within last three months.

It means that three months back an export consignment worth $1000 was equivalent to Rs104000. After devaluation the same consignment would fetch the exporter Rs116000.

In practice the exporters tend to share the benefit of devaluation with the foreign buyers.

They usually send more articles in the same consignment worth $100000 than before. This way they do not get the actual benefit of lower currency value. Exports suffer due to artificial high value of rupee.

Before this massive devaluation the exporters were complaining that they have become uncompetitive by a margin of nearly 10 percent.

This included high power tariff including Rs3.62 per unit electricity surcharge and numerous nonrefundable taxes they pay on various inputs used in production of export items.

They demanded an export package that was partially granted to them in the shape of refunds on realisation of export proceeds. But their demands to abolish electricity surcharge and equalisation of gas charges were not entertained. This way about 60 percent of their demands were rejected.

Now after gradual devaluation of around 11 percent their competitive advantage has not only been restored but the refunds also provide them additional benefits. Logically the exporters should now concentrate on increasing exports and withdraw their demands made before devaluation.

One thing is certain the exporters particularly the five major export sectors would continue to press for more concessions. This large devaluation would however prove that exports would not increase appreciably in sectors that are inefficient but there would be a substantial surge in value-added textiles and nontraditional exports.

Imports would become very expensive. The impact of rupee devaluation on imports is very high. Three months back 10 percent duty on a product worth one dollar (Rs104) was Rs10.4 and 16 percent sales tax on duty paid value was Rs18.24.

The cumulative cost was Rs132.64. Now the same one dollar product would be worth Rs116 and 10 percent duty would work out to be Rs11.6. The sales tax on duty paid value would be Rs20.36. The cumulative cost of the product would be Rs147.96. The impact on final price of imported item is higher than devaluation because of the levies.

Based on this procedure the rates of petroleum products would increase more because of duties. Logically the government should cap the duties at pre-devaluation level on this crucial commodity and take into account the impact of devaluation only. Unfortunately our governments consider devaluation as a revenue generator. After devaluation the government should cap duties on all essential items including crude and edible oil. This way its revenue targets would not be disturbed. The state would generate additional duties on the imports of all non-essential and luxury items.

The devaluation would also increase our debt stock in rupee terms on foreign loans. The foreign debt worth $70 billion that was worth Rs7,280 billion three months back would now balloon to Rs8,120 billion, which translates into a net increase of Rs840 billion. The debt servicing on foreign loans would thus increase by same amount in rupee terms.

Inflation would be a major concern from now on as increasing imports in rupee terms would create inflationary pressures. Further increase in fuel prices would be inflationary.

The only positive sign in this regard is that the outgoing government is taking difficult decisions in an election year and leaving nothing to the interim set up. This would help any future government to maintain macroeconomic stability.