Pakistan’s central bank has devalued the rupee. For the third time since December. Yet even before this week’s latest move, the currency was the worst-performing in the whole of South Asia; according to data compiled by Bloomberg.
Nevertheless, the interim set-up seems convinced that the country will not need a fresh International Monetary Fund (IMF) bailout package. Thus the message is that the fall in the rupee’s value by 5.1 percent to 121.5 per dollar is worth it.
If only things were so straightforward.
In theory, the protectionist measure of currency devaluation is good for the economy in the short-term. For this translates into cheaper exports; affording nations a comparative advantage of sorts. Yet this is often only passed on to the end consumer. Meaning that when this occurs during periods of salary stagnation, the outcome is invariably a fall in real wages. This should be a cause of concern for Pakistan given that analysts predict economic growth will slow in 2018; for the first time in six years. Though the country will escape the impact of currency devaluation on foreign labour given that this largely comprises those working in the international development sector; who are paid by donor nations above and beyond market prices.
Paradoxically, however, cheaper exports can often incur increased costs at home over time. This happens when manufacturers are less incentivised to adopt more efficient practices; which, in turn, may push up inflation. In addition, the flip side of cheaper exports is that import prices rise. In real terms, this affects petrol, certain foodstuffs and raw materials. If Pakistan is to offset this with the lure of a devalued currency as a visible boost to its tourist industry — it will have to build on the gains made to the overall security situation in the country.
The priority for the incoming set-up, therefore, is to truly get to grips with the fact that an economy cannot run on repeated currency devaluations. Not when the country is already home to a trade deficit of nearly $30 billion (as of May). Thus it must look to increase investment in manufacturing industries to make them more competitive. Infrastructure projects are certainly important. As are trade routes. But unless Pakistan boosts exports it will end up paying through the nose many times for such interconnectivity; both in terms of imports and the due return on infrastructure investment.
All of which underscores the urgent need for Pakistan’s fiscal policy to look beyond avoiding emergency bailouts. And to remind everyone that the trade-not-aid mantra only becomes feasible when debt is written out of the equation. *
Published in Daily Times, June 14th 2018.