Sunday May 19, 2024

How exporters handed the benefit of devaluation to buyers

By Mansoor Ahmad
July 12, 2019

LAHORE: Pakistan’s elect economic squad, handpicked after haphazard trial-and-error shakeups, is cock-a-doodle-dooing over a recent volumetric growth in exports, while being well-aware of the fact that there has been no improvement to write home about in terms of value.

This sad reality should be a matter of grave concern and not glorification as this phenomenon is Pakistan specific.

There are times when the global economy or a particular sector is in recession and to spur demand the producers are forced to reduce rates. But if the unit price of exports declines for other reasons; it indicates flaws in the system.

Usually as a result of low unit price the exports increase both in volume and value economic. This at least benefits the exporting country in earning higher foreign exchange. The increase in volumes with a slight decline in exports should have been investigated.

Was it in line with global trends? Which other currencies of our competitors have declined as sharply as ours? Why our exports did not benefit from the huge depreciation of rupee? Why was the impact of Rs44 billion worth of subsidies on exporters not reflected in the exports’ value?

We do not have the record of per unit decline in value of our regional competitors, but we do know, irrespective of an increase or a decline in unit value, the exports from India, Bangladesh, Vietnam and Cambodia are on rise. And the exports of these countries are rising in textiles that account for 65 percent of our exports. Another fact that should be noted is that the currencies in these economies are largely stable. This gives Pakistani exporters an advantage of around 40 percent in the last 18 months.

The question is that why our exports did not benefit from the rupee depreciation. The answer is simple; our exporters have passed on the benefit of rupee depreciation to the foreign buyers. This is despite the fact that Pakistan’s textile exports are the cheapest among its competitors. We compete with India in cotton yarn. The Indian cotton yarn is 14 percent more expensive than Pakistan’s. In cotton cloth, our competitor is again India. Similarly, the average export price of Indian cloth is 28 percent higher than ours.

In knitwear and readymade garments Pakistan’s regional competitors are China, India, Bangladesh, Vietnam, and Cambodia. In these countries per unit price of cloth products is much higher than Pakistan.

There’s no clue as to why Pakistani exporters lowered their unit prices facing no competition. One thing that comes to mind is that perhaps Pakistani exporters are easily blackmailed by foreign buyers, who know they wouldn’t get rates cheaper than Pakistan’s from anywhere else.

Every time rupee depreciates those overseas buyers demand discount that is at least 50 percent of the depreciation.

In case of exporters’ reluctance they approach other suppliers in Pakistan and manage to get away with the lowest rates. The exporters do not see depreciation as an opportunity to increase export but they deem it as a way to consolidate their customers and also benefit from the remaining 50 percent depreciation. They conveniently forget that every time rupee loses its value inflation and of course the prices of local inputs go up accordingly. This eats up most of the gains that expect to get from the depreciation that was not passed on to the buyers.

It is interesting to review the trend of textile products’ prices in Pakistan and India. Pakistan was exporting cotton yarn at $2.63/kg in 2017-18. The price declined to $2.60/kg in 2018-19. This is a nominal decline of one percent. India on the other hand was exporting cotton yarn at $3.12/kg in 2017-18 that declined to $3.11/kg. This amounts to 0.3 percent decline. The Indian cotton yarn is over 15 percent more expensive than Pakistan’s.

The export price of Pakistan’s cotton cloth products declined 19 percent from $0.98/square-meter in 2017/18 to $0.70/square-meter in 2018/19. On the other hand, the export price of same Indian products dropped 8.5 percent from $1.7/square-meter in 2017/18 to $1.07 in 2018-19. That means Indian products lost their value half as less compared to Pakistan.

In knitwear exports the unit price of Pakistan product declined by 5 percent compared to 3.8 percent decline in the value of same Indian products. In garments the per unit value decline for Indian exports was 3.8 percent, while for Pakistan recorded a fall of whooping 19 percent, while Indian knitwear and garments fetch higher prices than Pakistan’s.