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Exchange rate is simply the price of one currency against the other and just like any other price it reflects underlying supply and demand. There are many factors that impact this, including remittances, foreign investments and borrowing; financial or regulatory interventions by the central bank; expectations and associated speculation. However, in Pakistan’s case, a key factor underlying the falling rupee is the imbalance between our exports and our imports.
So how will devaluation help? In theory it would raise Pakistan’s exports by making them cheaper for foreigners, and reduce imports by making them more expensive for Pakistanis. Unfortunately exports do not respond quickly to devaluation. As a result, the bulk of adjustment in the short term has to come from a fall in domestic consumption, particularly of imported goods. The government must cushion the impact on the poor by fiscal measures — such a reducing duties and taxes on essential items — and reinforcing social protections programmes.
Apart from such compensatory actions, there is little the government can do in the coming months. The borrowing from global lenders and friendly countries allow continued import of essential items and help avoid a default. But this will not resolve the underlying imbalances in the economy which has a rich appetite for imported goods and little incentive to enter the competitive world of exports.
In the medium to long term, Pakistan has no alternative but to increase exports. This will largely be driven by the private sector investment; other macroeconomic variables such as the interest rates and inflation; international market opportunities; and the availability of local raw materials, labour and skills. Nevertheless, government policies will play a key role in determining the patterns of export growth.
Textiles is another sector that has for long suffered from low investment in modern machinery, and from poor designs and marketing; engineering, which needs to integrate into global supply chains; and ‘white goods’ (washing machines, refrigerators and ACs) which require linkage with e-commerce and retail networks inside and outside Pakistan. Working with partners, both in the West and from China, will help overcome these and other important technological gaps, limited funding and archaic management practices. The government needs to guide and oversee this process, promoting partnerships; making sure that adequate safeguards are in place particularly with regard to labour laws and environmental impacts; and incentivising a better spatial distribution of new manufacturing enterprises across the many small towns and cities in the country.
Agriculture also has excellent prospects. Raising agriculture exports will require new technologies and techniques; improved animal breeds and planting material; better husbandry and cultivation practices; effective irrigation and fertiliser use; and efficient processing, transport and storage facilities. As in the case of manufacturing, the government has a key role to play in the transformation of agriculture.
Making the economy more export-oriented is being forced on us by market forces. This is also likely to set us on a higher growth path. So instead of being drawn into a blame game on devaluation, the governmnet should focus on restructuring industry and agriculture. This will require putting other ministries and government institutions to work, and better collaborating with provincial governments where most industrial and agriculture policies have to be implemented.
Published in The Express Tribune, June 23rd, 2019.
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