Contrary to the claims of the Finance Ministry, the blame for a fall in our exports cannot be laid entirely at the doorstep of the ongoing global or a fall in consumer prices, consisting of the bulk of our exports, but on flawed economic policies that have not been revisited in spite of declining performance of these key macroeconomic indicators. Exporters lay the blame for the decline in exports on two major Finance Ministry policies notably inordinate delay in refunds that compels them to borrow which, in turn, raises their input costs relative to their foreign competitors' and an overvalued rupee that donor agencies as well as economists argue acts as a disincentive for our foreign buyers by making our products uncompetitive internationally. This is especially so given the recent depreciation of the currencies of our regional competitors, including China and India. However, the Ministry of Finance reportedly cites a couple of studies that show that an overvalued currency will have minimal negative impact on exports in the event that the country's major exports are consumer items (non-manufacturing).
A recent International Monetary Fund (IMF) study that suggests that between 1980 and 2014, a 10 percent depreciation by a country against the currency of a trading partner increased net exports by 1.5 percent of GDP with the bulk of the increase in the first year of the depreciation. Harvard professor Martin Feldman cites a paper presented by Gina Gopinath, a Harvard colleague, that many companies invoice their exports in dollars and change their dollar prices only very slowly when the exchange rate changes. As a result, a currency devaluation does little to increase the volume of their exports but does increase their profits. With existing inflation rates far below their target levels, the European Central Bank and the Bank of Japan can use currency devaluation to increase domestic inflation by increasing the prices of imports. His argument: an overvalued currency would naturally make imports more attractive, as has happened in our case, and a depreciation would check the massive rise in imports witnessed by Pakistan that dramatically increased our trade deficit.
Tadashi Nakamae, President of Nakamae International Economic Research, argues that two years ago (fall 2014) he warned that a weaker yen would increase Japan's trade deficit (nominal exports would increase but real exports would decline because Japanese companies have moved their factories abroad); simultaneously a weak yen would increase the value of imports. In this context, it is relevant to note that several Pakistani companies have relocated to Bangladesh not only in response to the declining business confidence, a recent OICCI survey indicates that business confidence has further faltered in Pakistan, but also to high input costs as well as better export terms available to firms operating in Bangladesh.
And finally, Holger Schmieding Chief Economist Berenberg points out that devaluation cannot offset genuine shifts on the terms of trade. For example, a plunge in commodity prices will hurt exporters of raw materials even if their currencies devalue strongly. Of course, the devaluation provides an incentive to shift resources towards other export-oriented activities. But such a shift will take time and cannot eliminate the adverse terms of trade shock. There is no doubt that commodity prices have plunged globally but at the same time, the Pakistan government would be well advised to acknowledge that our import bill has been rising, at a time when the international oil prices are declining, and rising imports are contributing much more to the widening of the trade deficit compared to a fall in our exports.
The warning signs are there for an overvalued rupee and one can only urge the Dar-led Ministry of Finance to take cognisance of ongoing research instead of focusing on a study to prove the efficacy of their policy. Donors have openly acknowledged that our foreign exchange reserves are debt enhancing and an overvalued rupee in this context would simply increase reliance on borrowing as exports decline and imports rise.
Copyright Business Recorder, 2017