Pakistan should let its currency depreciate almost 9% to remain competitive in the world, said a former World Bank official on Thursday, joining the chorus to put pressure on the central bank to allow the market determine the real value of the rupee.
Dr Parvez Hasan, former chief economist of the East Asia Division of the World Bank said depreciation was essential to keep exports competitive, a strategy followed by neighbours India to boost trade.
India adopted this responsive exchange rate policy and devalued its currency almost 15%.
Dr Parvez Hasan, who had remained Chief Economist of West Pakistan, was speaking at the annual conference of Pakistan Institute of Development Economics.
The International Monetary Fund recently asked Pakistan to make its exchange rate ‘responsive’.
Independent economists have been asking the State Bank of Pakistan to allow the rupee to shed some value. Since the IMF’s statement, the rupee has been depreciating and traded at new lows of 89.60 against the US dollar. Economists believe that still real value of the rupee against the dollar is 95. Last month the central bank injected $130 million in the market to stabilise the currenc, sources in the SBP said.
“We do not have to be emotional about the exchange rate”, said Dr Parvez Hasan. He said “if confidence on our currency goes, it will be very difficult to revive it in the eyes of the world”.
The opponents of further depreciation, predominantly people like Dr Ashfaque Hasan Khan, argue that the devaluation would trigger inflation and prices of oil, electricity and transport charges would increase.
Dr Parvez said that it was the consecutive fifth year of double-digit inflation, a phenomenon unprecedented in the past. He said the inflation is fuelled by large government borrowings.
He said the country’s “biggest failing was not to follow export-oriented strategy and his biggest failure in life was the inability to convince the government to adopt the export-oriented policies”. Dr Hasan said that despite global downturn the world trading system will not collapse.
He said troubling aspect of the economic picture was bad governance. The economic managers have not yet devised the strategy to revive the economy. Dr Hasan also criticised the aid-driven growth strategy and said that foreign assistance can never be a driver of growth. Only those countries can benefit from the advice of the World Bank who know where they want to go, he added.
He said current saving rates can ensure only 3.5 per cent growth rate while the country needs much higher growth to accommodate the increasing young workforce. “The political leadership never gave high priority to encourage savings and the results are foreign borrowings to substitute domestic revenues”.
He put his trust in the exploitation of the country’s enormous human capital. He also laid emphasis on the need to develop the agricultural sector and exploit its full, untapped potential.
The Pakistan Society of Development Economists honoured Dr Hasan on the occasion for his meritorious services in the field of development economy.
Published in The Express Tribune, December 16th, 2011.
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This has been Dr Pervaz Hasan's criticism for a long time especially since he worked on a number of high export-led economiess in Asia when in the World Bank. It also comes out quite strongly in his recent book.
There is some merit to the argument. Competitiveness DOES matter. The exchange rate should not be treated as a political issue with periods of "stability" lauded and periods of "depreciation" decried.
With our inflation rate almost three times as fast as that of our competitors, we have no choice but to devalue to ensure some semblance of REAL competitiveness.
If that is not acceptable politically, then we need to bring our inflatin rates down and in-line with our competitors.
We cannot have it both ways -- have our cake and eat it too.