The PKR debate

On Friday May 15, Business Recorder readers came across a report "Overvalued PKR hurting exports, NA body told".
It is beyond one's comprehension why a Ministry has decided to lodge a protest against SBP's exchange rate policy. If true, then this is a clear breach of State Bank of Pakistan's autonomy, which is in negation of the IMF demand. Managing exchange is State Bank of Pakistan's prerogative and is not a fiscal issue.
For the past many years, without any sound reasoning, this is a faulty demand/argument that has failed to produce desired result. It is one of the easiest excuses given by exporters to blame a strong Rupee as a major cause of declining exports.
How can you ignore shortage sof energy, which is the mother of all ills? Why does the business community have to make a hue and cry all the time and demand subsidies and rebates for every domestic and international transaction when wheat, sugar and other commodity prices are artificially inflated to extreme levels or even much higher than the international market prices in the name of support price?
The topic of Exchange Rate is a complex subject to analyse due to many variables and benchmarks, as there are quite a few factors involved in determining the real value of a currency.
There are many models available that can be debated. REER (Real Effective Exchange Rate) is the most common model and is frequently discussed in our part of the world.
The working is based on value adjustment of the currency against a basket of currencies after adjusting the inflation differential between domestic economy and the reference economy (eg Pakistan versus USA).
Let us take the 2104 average inflation numbers, in Pakistan; it was 7.2 percent versus USA's 0.8 percent. This model demands that PKR should be depreciated by roughly 6.4 percent.
In my view, it is a flawed model, which is not applicable to Pakistan because it is worth noting that 85 percent of the country's total trade volume is US Dollar-based and the remaining 15 percent is in other currencies (Euro, GBP, JPY, etc). So the basket does not reflect a true picture. This is why excessive depreciation of Rupee has not served the purpose and instead it has caused excessive economic sufferings.
Further, REER is prone to circular casualty that refers to continuation of a series of events (Chicken and Egg example). When REER is used for inflation differential purpose to cause an adjustment in currency value, it brings a change in the value of currency resulting further inflation differential. Hence it is again required to further adjust the value of currency, which continues on and on and hence can be described as circular casualty.
To support my argument, we have a very poor history of Export/Import mismatches. Despite a 70 percent rupee depreciation since over last 5-years, our exports have been struggling around USD 25 billion versus import bill hovering and inching towards USD 44-45 billion mark.
To give comparative analyses there is a need to take examples of India and Bangladesh. It is worth mentioning that since FY 2009-10 until FY 2014-15 (May), Rupee fell from 60.80 per US dollar to USD 101.90 (Current) or nearly 70 pct. During this period Indian Rupee weakened by 32 pct and Bangladesh Taka lost 13 pct of its value against US Dollar. So what is the real cause of Pak Rupee depreciation when it does not make notable economic contribution? Probably to satisfy the IMF!
Suppose if it is argued that strong currency makes country's export less competitive and it also makes exports expensive then why there is no argument about the price that country had to pay due to substantial weakening of Rupee that makes import expensive too. A loss in the value of Rupee makes life of a common man miserable, as it is also one of the major causes of high inflation.
Overall, there is a chain effect, as expensive imports and poor export performance also cause a shortfall in revenue collection resulting in a sharp hike in discount rate. It has slowed down business activity and led to a severe liquidity crunch, forcing money printing to meet government borrowing demand, inflating domestic debt to unimaginable heights.
In our economic environment, such economic gimmick does more harm to the economy. The truth is that real economic strength is attained when there is stable government with a constructive and prudent economic policy, which provides confidence. The economy is required to be well supported with fiscal discipline and anti-inflationary monetary policy.
I agree that the responsibility of Ministry of Commerce is to encourage export promotion, but the tilt should be more towards trading and regulation of export oriented industries. MoC can play a vital and more effective role by providing services to create an enabling environment, which can assist to encourage and facilitate the development of private sector. Therefore, argument raised by Ministry of Commerce is not at all very convincing, which if again raised, should be questioned and challenged by the National Assembly body.
(The writer is former Treasurer of Chase Manhattan Bank)