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Why Weak Rupee will never Help Exports ?

May 1, 2017

by Asad Rizvi
In Pakistan’s financial market, exchange rate is one the most favorite topic, which is commonly discussed at all levels based on reports/view (foreign & local) without providing evidence that why/how weak Rupee will contribute towards strengthening of economy. In last 10-15 years, exports in Pakistan have never responded to weak Rupee Policy.

Instead, weak Rupee stance is one of the major causes of economy misery (Inflation) at the cost of nation that has inflicted sever damage to their well being during all these years resulting continues hike in prices of Real Estate, Petroleum, Gas, Electricity, Bread, Rice, Sugar, Eggs, Meat, Poultry, Lentils, Vegetables, Vehicles, Transportation, Household Electrical/Machinery etc that has sky rocketed prices of all household items to an unbelievable levels based on per capita income (wages/income).

All those Pundits that have been demanding depreciation of Rupee by 20 pct for quite sometimes are basically followers of outdated bookish theory preferring copy paste procedure, because none have ever given a number in past/present that how much depreciation has contributed in growth and how much will 20 % depreciation further add/contribute towards GDP growth rate, increase/add Foreign Exchange Reserves in US Dollar term, increase/push Revenue Collection higher and bring relief/easing of Current Account Deficit/Trade Gap.

Without providing number input by those screaming Rupee is overvalued, if the argument is only based on Exporters demand or REER (Real Effective Exchange Rate) based calculation, which is a flawed model that has very little following all over the globe then it is considered a hollow argument.

Because as per REER, adjustment of currency is based on differential between domestic and its trading partner country’s inflation rate and trade deficit. This is why they demand Rupee parity against USD should be @ 126.

Based on similar REER calculation then Rupee should be annually depreciated by 4-6 pct and in next 5-years parity should then be Rs 160 per one US Dollar, as Fed Interest Rate in next 10-year will remain below or around 2 pct as US interest rates will exhaust to put brakes on high borrowing cost.

This is why to give boost to growth and to finance deficit borrowing cost is kept low by the Major Global Central Banks that had opted for Unconventional Monetary Policy.

Crux of My Argument

Pakistan’s business model suggests that we are basically opportunist, as we only looking for self gain at the expense of others always demanding rebate and subsidies. In last 2-decades or so the size of our GDP has grown by nearly 4-times, but Tax to GDP profile speaks in volume that we are tax evaders and prefers to hold cash money, which is why Currency in Circulation has hit Rs 3.59 Trillion or 63 pct of the total size of Commercial Bank Advances.

Meanwhile, Exporters and so called self imposed Guru’s have never uttered a positive word about the benefit they are enjoying from sharp cut in Discount/Policy Rate from 10 pct to 5.75 pct and Export Refinance Rate dropping down to 3 pct from  8.4 pct. This is extraordinary relief given to the community.

Further, at the time of lowering of projected Discount Rate/Target Rate, “Rain Frog” group popped up demanding halt in Rate cut, blowing trumpet that cut in discount rate will have adverse impact on exchange rate, which will sharply weaken Rupee.

This theory has vanished into thin air. They had no clue about the favorable interest rate differential factor, which gives advantage to Rupee and makes it attractive because of wide interest rate gap against Major/Minor currencies.

I am not sure if someone has the guts to come up with real/estimated numbers to tell readers that how depreciation of Pak Rupee can bring increase in Pakistan’s exporters share in foreign market ?

What type of products in bulk exporters can offer to become competitive, because to obtain better pricing export size has to be large as per market demand ?

How will depreciation of Rupee bring increase in sales to boost economic growth and create new jobs that will concurrently help in increasing corporate profits by engaging foreign markets that will ultimately help push much needed Revenue Collection higher?

The truth is that demand for depreciation of Rupee and blaming overvalued Rupee for fall in exports is a stale therapy and outdated wish list, as global trading norms have changed.

Why Weak Rupee will never help Exports ?

Today I will try to explain in detail to silence the critics. Economically by maintaining a balance to a sustainable level, it is a perfect strategy for the manufacturing and industrial economies such as China, Japan and ECB. From 2014 until 2016, similar pattern was witnessed in South Korean and Australia. In recent times Canada and Brazilian economy is faced with identical situation, but current trend is not as helpful.

Since all aforementioned countries are manufacturing and industrial economies, hence when they Devalue/Depreciate their currencies their exports become cheaper and tourism becomes attractive too, which helps to improve its overall job market (Consumer & Manufacturing) that simultaneously give boost to its domestic economy.

This theory does not apply to Energy (OIL & Gas) producing economies, as witnessed in oil dependent economies because oil is a commodity and unlike manufacturing products its consumption is limited. Hence, recent oil collapse proved to be a disaster for Venezuela, Russia and OPEC members.

If we compare two scenarios with each other the answer is very simply, when manufacturing economies weaken its currencies they can become competitive as their export could surge and its economy is likely to get boost. Its tourism industry too attracts good number of foreign visitors that helps both the sector.

While, all the oil producing/exporting economies are totally dependent on their oil sale, but drop in oil prices have adverse impact on their respective economies because their oil receivable gets sharply squeezed. In falling oil trend it neither creates new job opening nor oil sales gets boost because consumption of oil importing countries remains unchanged. It does not impact its tourism industry, which is comparatively small in size.

Pakistan’s economy does not fit in both the scenarios. Here, what is our status ? I mean, after depreciating Rupee what do we have to offer in bulk size. Basically our suffering is due to ill planed policy flaw, as we can only offer raw material in small lots. This is why over a decade though Rupee lost 72 pct of its value against USD from 62 to 104.85 and yet Pakistani exports are in continuous struggling mode. Remittances are the only hope that is doing well despite disastrous economic condition in Gulf Oil producing countries. In such economic condition it is shameful excuse to blame 2 pct fall in remittances, which is meager in size and likely to increase in size in next two-months. Weak economic condition in Europe is also a contributing factor that saw mild dip in inflow.

What should bother most and is alarming and is a matter of concern that despite sharp fall in the value of Rupee over a decade and plunge in oil prices since last 30-months, import bill is hovering at a very high level that has sharply widened the trade gap.

Pakistan’s exchange rate history will provide further guidance that weak Rupee strategy has never responded to arrest rise of high import bill, as it’s purely a Fiscal matter that can only be checked through policy changes at Federal level by imposing high import duty.

Over the years, weak Rupee and abnormally high return in investments are two major factors that have severely dented the economy costing nearly Rs 4 Trillion in excess to the Exchequer. If ongoing stance remains unchanged, annual deficit financing in next term will reach Rs 2 Trillion and by end of next term Debt will get closer to Rs 30 Trillion mark.

It is recommended that Rupee should move in line with its competing partners and should appreciate by 2-3 pct. Recently against US Dollar Indian Rupee gained by nearly 5 Pc. Euro, Pound Sterling and Yen too made sharp gain by around 4 to 5 pct. South Korean Won is up by 6 pct, Vietnamese Dong and Philippines Peso is almost unchanged.

Similarly, IMF & other agencies for next 2-years is projection to remain 5 to 5.5 pct, which is encouraging then there is no point offering higher yield and high coupon rate, which should be slashed accordingly.

SBP has done remarkably well by effectively managing its exchange rate and policy rate that has helped in implementing financial and price stability as per required norms. Fiscal reform is the key for next direction or else downside economic risk will prevail.


(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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