Rupee overvalued?

Capital suggestion
Our trade deficit widened by 34.78 percent in the first five months of the current fiscal year. As per data from Pakistan Bureau of Statistics (PBS), Pakistan’s trade deficit widened by 17.96 percent during July-January of FY2015. Lo and behold, the trade deficit over July to February widened by a wholesome 16 percent.
Imagine; our oil import bill accounts for a good 30 percent of our entire imports and the OPEC basket price has come down from $108 per barrel in June 2014 to $44 per barrel in January 2015. But our trade deficit still widened by 16 percent to a colossal $14.1 billion from July through February.
Red alert: our exports are falling – falling like nine pins. Wasn’t GSP+ expected to boost our exports? Yes, the energy crisis is an issue – and the PML-N is yet to add a single wattage. Yes, the cost of doing business in Pakistan is an issue – and the PML-N is yet to undertake any structural reform. Yes, the shortage of skilled labour is an issue. To be certain, these are issues that have been with us for a long time.
For the record, something very rare is happening in the currency markets. In 2014, the US dollar gained 13 percent against a basket of world currencies. And over the past three months, the US dollar gained a hefty 10 percent – that’s very rare in the currency markets; a once in a decade such a sharp movement. Look at what is happening to other emerging market currencies: Indonesian rupiah is down 6 percent; Malaysian ringgit is down 5 percent; Turkish lira is down 11 percent; and the South African rand is down 6 percent.
Look at what is happening in the developed economies: the US Federal Reserve is tightening (read: not printing too many dollars); the European Central Bank is loosening (read: printing euros like crazy); and the Nippon Ginko, the central bank of Japan, is also loosening. So, what is happening is that the dollar is going through the roof.
Look at what is happening in Pakistan: since September 2013, the real effective exchange rate (REER) of the rupee has appreciated by 10.6 percent (exactly when.
According to S M Tanveer, Chairman All Pakistan Textile Mills Association (APTMA), “20 textile mills have already closed down operations due to loss of competitiveness oozing out of real exchange appreciation” and that“100 textile mills are vulnerable to viability issue and seriously considering of closing down.”
Yes, it can be argued that because our imports are more than our imports we ought to keep our rupee slightly overvalued. The current overvaluation, however, is making our goods uncompetitive in the international markets. If REER is to be used as a yardstick, the rupee trading in the range of Rs112 to-a-dollar to Rs115 to-a-dollar will serve Pakistan’s economic interests the best.
SBP has done a fine job in taking the volatility out of our foreign currency market – and Ashraf Mahmood Wathra, the 18th governor, should be given credit for that. How about SBP taking a look at how our competing emerging markets have depreciated their currencies? Isn’t it time for some steady manoeuvring? Isn’t the rupee’s overvaluation sort of risky for Pakistan’s economic fundamentals? Can we really afford an overvalued rupee?
The writer is a columnist based in Islamabad. Email: farrukh15@hotmail.com
Twitter: @saleemfarrukh