A case of de­val­u­a­tion

The Pak Banker - - 4ED­I­TO­RIAL - Dr Ka­mal Mon­noo

ONLY a cou­ple of months back, I had writ­ten ex­ten­sively on why de­val­u­a­tion of the Pak­istani ru­pee would be a mis­take. There were some good rea­sons for my opin­ion, fore­most be­ing that since the gov­ern­ment was con­tem­plat­ing this move pri­mar­ily to res­ur­rect Pak­istan's dwin­dling ex­ports, it ought to be cau­tioned that over long-term cur­rency de­val­u­a­tions do pre­cious lit­tle to boost a coun­try sus­tain­able ex­port­ing for­tunes.

And specif­i­cally in our case de­val­u­a­tion may not bring much joy even in the short-run. Tex­tiles con­sti­tute bulk of our ex­ports (be­tween 55-60%) and per­haps the only real man­u­fac­tur­ing in­dus­try that op­er­ates at global com­pet­i­tive­ness - the other ex­ports in ser­vices, gems & jew­elry, fur­ni­ture, fish­eries, in­for­ma­tion tech­nol­ogy, be­ing mainly de­sign, skill or niche ori­ented where price is only one of the many fac­tors in in­flu­enc­ing cus­tomers de­ci­sions . If the aim was to raise tex­tiles' man­u­fac­tur­ing com­pet­i­tive­ness through de­val­u­a­tion, then the strat­egy won't hold.

It is im­por­tant to note that cost of do­ing busi­ness at home has pri­mar­ily gone up due to poor busi­ness en­vi­ron­ment and gov­ern­men­tal in­ef­fi­cien­cies (util­i­ties, un­nec­es­sary over­sight, cor­rup­tion, liq­uid­ity squeeze, etc) and de­val­u­a­tion would in-ef­fect just end up sub­si­diz­ing these in­ef­fi­cien­cies. Fur­ther, de­val­u­a­tion in iso­la­tion can­not achieve much un­less the de­mand abroad is price elas­tic. So, in essence, real so­lu­tions lie in fix­ing our sup­ply side bot­tle­necks and not in de­val­u­a­tion.

Sec­ondly, it is al­ways good to learn from his­tory. In­dia jumped from ex­ports of merely $25 bil­lion in 1991 to nearly $300 bil­lion to­day; China's me­te­oric ex­port-climb since 1989 (year of its join­ing WTO) is well known; Brazil tripled its ex­ports from 1997 to 2007; and Bangladesh's climbed from nil tex­tile ex­ports in 1995 to over $30 bil­lion to­day, with the point to note here be­ing that these ex­port suc­cess sto­ries came about in a pe­riod where their cur­ren­cies held their own and re­mained sta­ble. In fact, in cases of China, In­dia and Brazil, if any­thing, their cur­ren­cies dur­ing this pe­riod in­stead tended to be firm against other global cur­ren­cies.

Thirdly, we must keep in mind that Pak­istan has al­most al­ways been a coun­try with a cur­rent ac­count deficit (CAD), mean­ing our im­ports have ex­ceeded ex­ports. And with bulk of our im­ports be­ing in­elas­tic in na­ture (fuel oil, ed­i­ble oils, food items and phar­ma­ceu­ti­cals), de­val­u­a­tion would mostly mean an added pres­sure on CAD.

Fourth, Pak­istan's ex­ter­nal debt (in for­eign ex­change) is very high and de­val­u­a­tion would mean a jump in ex­ter­nal li­a­bil­i­ties with­out adding any cap­i­tal value against as­sump­tion of this ad­di­tional li­a­bil­ity. Fifth, Pak­istan is mov­ing through some very chal­leng­ing times vis-à-vis ge­o­graph­i­cal and po­lit­i­cal se­cu­rity sit­u­a­tion and de­val­u­a­tion would se­ri­ously com­pro­mise our abil­ity to suc­cess­fully man­age our se­cu­rity needs, which are sig­nif­i­cantly im­port based.

Last but not least, sixth, an erod­ing cur­rency value is in­vari­ably ac­com­pa­nied with mul­ti­ple eco­nomic un­de­sir­ables: stokes in­equal­ity in-turn widen­ing the in­come gap; ad­versely af­fects fair dis­tri­bu­tion of eco­nomic op­por­tu­ni­ties; high cap­i­tal costs fa­vor mo­nop­o­lies and make start-ups so much more dif­fi­cult; real es­tate prices of­ten move be­yond the reach of av­er­age cit­i­zen; en­cour­ages cor­rup­tion as ill-got­ten for­eign wealth port­fo­lios mul­ti­ply over night; ne­ces­si­tates change in on-go­ing pol­icy choices (for ex­am­ple, all cal­cu­la­tions on pri­va­ti­za­tion bench­marks be­come re­dun­dant as re­place­ment costs and in­tan­gi­ble anti-trust val­ues of a state run en­ter­prise be­come so much dearer); and some­how the very act of de­val­u­a­tion au­to­mat­i­cally con­verts it­self into a neg­a­tive eco­nomic per­cep­tion, erod­ing na­tional con­fi­dence, lead­ing to flight of cap­i­tal.

How­ever, hav­ing said this, the re­al­ity is that eco­nomic man­age­ment can­not be frozen in time and as­tute pol­icy man­agers need to re­al­is­ti­cally adapt to chang­ing times and shift­ing global re­al­i­ties.

To­day, more than ever, the global econ­omy is look­ing shaky. Mar­kets for things, as di­verse as oil and Euro­pean bank shares, have plumbed new lows. Ja­pan is tee­ter­ing on the brink of per­sis­tent re­ces­sion, Europe is mired in low growth, United States is fac­ing a drag on growth as the strong dol­lar makes it cheaper to im­port in­stead of buy­ing from Amer­i­can busi­nesses and China, the world's en­gine of growth, is strug­gling with heavy debts, a slow­down in man­u­fac­tur­ing, stag­nant ex­ports and flight of cap­i­tal.

The tried-and-true cures no longer seem to be work­ing. So the ques­tion arises, what is the new mon­e­tary tool, which more and more coun­tries these days are begin­ning to re­sort to? The an­swer is, ' de­val­u­a­tion'. As ev­i­dent in their Fe­bru­ary 2016 meet­ing, gone is the once firm com­mit­ment amongst the G-20 mem­bers to "man­age their cur­ren­cies re­spon­si­bly, rather than shift­ing their value".

The Euro went through its own long process of de­cline dur­ing 201415, shed­ding more than 20% in value, China's de­val­ued in the sec­ond half of 2015 and then since Rin­minbi be­came one of the re­serve cur­ren­cies of the world (in-turn also putting added pres­sure on ri­val ASEAN ex­porters to do the same or risk los­ing their com­pet­i­tive­ness), Rus­sia and Brazil have re­cently al­lowed their cur­ren­cies to fall steeply against the dol­lar (nearly 20%), and of late we have seen the Pound Ster­ling drop its value by more than 10% in less than a quar­ter. A cur­rency war seems to be on, rais­ing fears of beg­gar-thy-neigh­bor de­val­u­a­tions of the sort seen in the 1930s, which led to a col­lapse of in­ter­na­tional trade.

Given this sce­nario it would be fool­hardy for Pak­istan's fi­nan­cial man­agers to just sit on the side­lines and do nothing. If they don't act now, the reper­cus­sions could be grave.

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