Pakistan's overall balance of payments has almost always been in negative with the exception of one/two years in 1950s -when the Korean war boosted our exports- and two years or so in the aftermath of 9/11 when we became reasonably surplus in the external account.
Our balance of payments was surplus to the extent of $2.7 billion in the fiscal 2001-02, and $4.6 billion in the fiscal 2002-03. Our economic mangers at that time have been claiming that the success was due to the policies pursued since October,1999 take over. However, the success could not be sustained even during the medium term and U-turn commenced in the fiscal 2003-04 when the balance of payments surplus came down to merely $887 million and it further came down to $410 million in the fiscal 2004-05.
When the economic managers had been attributing the success to the post-October,1999 policies, overwhelming majority of the economic writers held the opinion that all these positive developments owe their origin to 9/11 events and the political decisions taken thereafter and now the time has substantiated that the latters were correct.
The solution to the external sector imbalances off and on suggested by the Bretton Woods Institutions (BWIs) was devaluation of the Pakistani rupee because in their opinion the external sector imbalance is the result of "overvalued Rupee" and its devaluation would result in increase in exports, reduction in the imports and attraction of invisible receipts in greater proportions. We have been faithfully implementing this strategy over the last quarter century. This pink pill remedy was also got implemented by these institutions in other developing countries.
The consistent implementation of the BWI's suggestions/advices (read orders) over the last quarter century has completely embedded the brains of our central and commercial bankers with the same philosophy and they also advocate it.
SBP in its report for the first quarter of the fiscal 2005-06 (Q1-FY-06) has also expressed somewhat similar view point by stating on page 53 that: " A part of the pressure on the SBP reserves may simply reflect the normal leads and lags in foreign currency flows in the interbank market.
These would not be source of concern as the central bank would add liquidity in the interbank market to meet shortfalls and then re-purchase in times of surplus liquidity. The risk is that such interventions could lead to excessive exchange rate stability, distorting the price signals in the market."
The question is what is the "excessive exchange rate stability" and why should we be worried about it, when India is maintaining the $-I.Re parity of I.Rs 44-45 for many years and China was also not worried but under pressure from America it was compelled to make upward revaluation of the Yuan.
And if the foreign exchange market is in short, who is expected to make good the shortfall- as it has to be done instantly unless the risk of default at international level is assumed- while the pink pill treatment of devaluation, if at all it is effective, is unlikely to bridge the gap instantly. Even if the devaluation is considered as a remedy, it could at best be a long term one even though our past experience hardly substantiates the theory. It is also debatable if the feeding of the "short" foreign exchange market can really be termed as "intervention".
Uptill 1998, when the Rupee was put on the so-called free float, the banks used to operate on the limits given to them by the SBP. They used to carry out transactions by undertaking buying /selling among themselves and if at the end of the day funds in excess of the prescribed limit were available, the same used to be sold to SBP while in the case of shortfall, purchases were made from the SBP. Thus the market was kept square at the end of each working day. It was thus in today's terminology daily intervention by the SBP without calling it as such.
Has the pink pill remedy of devaluing the Rupee succeeded in remedying the external sector imbalance by enhancing exports and decreasing imports to the desired level. Let us examine it in greater depth. To this end, this scribe has collected the data about the devaluations of Pak Rupee which took place during the last over two decades and $ fetched by the country through exports and the $ spent on the imports.
THE RELEVANT DATA IS SUMMARIZED IN THE TABLE I APPENDED:
TABLE I-IMPORT, EXPORT AND RUPEE DEVALUATION:

==================================================================================================================
                                 U.S.$-Rupee rate                  Export                     Import
Fiscal year   At end of   At beginning    (+) Appreciation   U.S.$      (+)Increase     U.S.$          (+)increase
              fiscal      of fiscal       (-)  Depreciation  (billion)  (-) Decrease    (billion)      (-)Decrease
                                                                        over last year              over last year
------------------------------------------------------------------------------------------------------------------
1984-85       16.00       13.98           (-) 12.62%         2.457       -              6.009                    -
1985-86       16.82       16.00           (-)  4.88%         2.942       (+) 19.74%     5.984            (-) 0.42%
1986-87       17.35       16.82           (-)  3.05%         3.498       (+) 18.90%     5.792            (-) 3.21%
1987-88       18.00       17.35           (-)  3.61%         4.362       (+) 24.70%     6.919           (+) 19.46%
1988-89       21.10       18.00           (-) 14.69%         4.634       (+)  6.24%     7.207           (+)  4.16%
1989-90       21.79       21.10           (-)  3.17%         4.926       (+)  6.30%     7.411           (+)  2.83%
1990-91       24.30       21.79           (-) 10.33%         5.902       (+) 19.81%     8.385           (+) 13.14%
1991-92       25.13       24.30           (-)  3.30%         6.762       (+) 14.57%     8.998           (+)  7.31%
1992-93       27.16       25.13           (-)  7.47%         6.782       (+)  0.30%     10.049          (+) 11.68%
1993-94       30.61       27.16           (-) 11.28%         6.685       (-)  1.43%     8.685           (-) 13.57%
1994-95       31.01       30.61           (-)  1.29%         7.759       (+) 16.07%     10.296          (+) 18.55%
1995-96       35.10       31.01           (-) 11.65%         8.311       (+)  7.11%     12.015          (+) 16.70%
1996-97       40.46       35.10           (-) 13.24%         8.096       (-)  2.59%     11.241          (-)  6.44%
1997-98       44.05       40.46           (-)  8.15%         8.434       (+)  4.17%     10.301           (-) 8.36%
1998-99       46.7904     Average of      (-)  5.85%         7.528       (-) 10.74%      9.613           (-) 6.68%
1999-00       51.7709     T.T.buying/     (-)  9.62%         8.190       (+)  8.79%      9.602           (-) 0.11%
2000-01       58.4378     Selling rates   (-) 11.40%         8.933       (+)  9.07%     10.202           (+) 6.25%
2001-02       61.4258     for the year    (-)  4.86%         9.140       (+)  2.32%      9.434          (-) 7.52 %
2002-03       58.4995     picked up       (+)  5.00%        10.974       (+) 20.06%     11.333          (+) 20.13%
2003-04       57.5745     from SBP        (+)  1.61%        12.459       (+) 13.53%     13.378          (+) 18.04%
2004-05       59.35 76    annual reports. (-)  3.00%        14.450       (+) 15.98%     18.965          (+) 41.76%
==================================================================================================================

From 1984-85 to 1997-98, exchang e rates depict SBP's buying rates circulated vide F.E. circulars issued by the Bank from time to time. The figures of imports and exports picked up from "Balance of Payments" statements published in SBP annual reports.
It will be seen from the Table that out of 21 years, Rupee was devalued during 19 years. No doubt, exports increased during 17 years. But direct relevance between the quantum of devaluation and increase in exports is not visible.
In 1985-86, 1986-87 and 1987-88, Rupee was devalued to the extent of 4.88 per cent,3.05 per cent and 3.61 per cent only but there was sharp rise in the exports to the tune of 19.74 per cent, 18.90 per cent and 24.70 per cent respectively. In 1988-89, the devaluation was sharp- of the order of 14.69 per cent- but the exports rose by 6.24 per cent only while in the succeeding year 1989-90 much lesser devaluation of 3.17 per cent raised the exports by 6.3 per cent.
In 1990-91, 10.33 per cent devaluation raised exports by 19.81 per cent while in the succeeding year 1991-92, merely 3.3 per cent devaluation increased exports sharply by 14.57 per cent. In 1992-93, 7.47 per cent devaluation could hardly move the quantum of exports while in 1993-94, a sharp devaluation of 11.28 per cent resulted in the decline in exports by 1.43 per cent. In 1994-95, the marginal devaluation of 1.29 per cent gave the exports hefty jump of 16.07 per cent but in the succeeding year 1995-96, heavy devaluation of 11.65 per cent could raise the exports by merely by 7.11 per cent.
In 1996-97, sharp devaluation of 13.24 per cent resulted in decline in exports by 2.59 per cent. The 8.15 per cent devaluation of 1997-98 could raise the exports by merely 4.17 per cent while in 1998-99, with the devaluation of 5.85 per cent, exports declined sharply by 10.74 per cent.
In 1999-00 and 2000-01, the substantial devaluations of 9.62 per cent and 11.4 per cent could raise the exports by 8.79 per cent and 9.07 per cent only while in 2001-02, the export growth of 2.32 per cent was much less the devaluation of 4.86 per cent. In 2002- 03, imports/exports both rose by over 20 per cent despite the fact that the Rupee appreciated by 5 per cent during that year. The export data for 2003-04 has no relevance with the devaluation as the exports rose sharply by over 13 per cent despite marginal appreciation of the rupee. The provisional export data for 2004-05 puts it at (+) 15.98 per cent even though the Rupee depreciated only marginally by 3 per cent.
The imports did not respond to the quantum of the Rupee devaluation. In 1985-86 and 1986-87 imports dropped marginally but in the subsequent 6 years 1987-88 to 1992-93, imports rose continuously despite the fact that two of these years saw rupee depreciation of over 10 per cent. 1993-94 was the only year when the imports dropped substantially by 13.57 per cent but in the following years 1994-95 and 1995-96, imports grew heavily by 18.55 per cent and 16.7 per cent despite heavy Rupee devaluation of 11.65 per cent in 1995-96. In 1996-97, the sharp devaluation of 13.24 per cent could bring the imports down merely by 6.44 per cent while in 1997-98 and 1998-99, the cut in imports merely matched the quantum of Rupee devaluation. Again in 1999-00, heavy devaluation of 9.62 per cent could hardly have any impact on imports. In 2000-01, heavy devaluation of 11.4 per cent increased the imports by 6.25 per cent and 2001-02 was the only fiscal in two decades where quantum of reduction in imports exceeded the quantum of Rupee devaluation.
Pakistan worked on the fixed parity between Pakistan Rupee and $ uptil January,1982 when the managed float system was introduced under which the $-Rupee parity was reviewed daily by the SBP and changed when considered necessary. Let us also examine how our external trade fared during the fixed Rupee-$ parity regime. Upto a few months after dismemberment of Pakistan, the country was maintaining a parity of Rs 4.76 to a $.
On the 12th May,1972, under the "Exchange Reforms" introduced by the then Government, Rupee was sharply devalued from $1= Rs 4.76 to $1= 11.00- a devaluation of 56.7 per cent. This parity continued till March,1973 when $ was devalued and the new parity was fixed $1= Rs 9.90 which continued till January,1982 when the new system was put into force. Now let us examine whether the exports really suffered and whether there had been abnormal growth in imports without cogent reasons during the fixed exchange rate regime. In this connection, Table II is appended which gives our external trade data during 1972-73 to 1981-82- fixed parity period:
TABLE II: IMPORTS AND EXPORTS [ FIGURES IN MILLION U S $]

===================================================================
year     Import     (+) increase       Exports         (+) increase
                    (-) decrease                      (-)  decrease
                    over precious year          over previous year.
-------------------------------------------------------------------
1972-73    891       -                  766                       -
1973-74   1493      (+) 67.56%         1020              (+) 33.15%
1974-75   2114      (+) 41.59%          978              (-)  4.11%
1975-76   2139      (+)  1.18%         1162              (+) 18.81%
1976-77   2418      (+) 13.04%         1132              (-)  2.58%
1977-78   2751      (+) 13.77%         1283              (+) 13.34%
1978-79   3816      (+) 38.71%         1644              (+) 28.14%
1979-80   4857      (+) 27.28%         2341              (+) 42.40%
1980-81   5563      (+) 14.53%         2799              (+) 19.56%
1981-82   5769      (+)  3.70%         2319              (-) 17.15%
===================================================================

SOURCE: SBP annual report for fiscal 1982-83
In case the devaluation could effectively curtail imports, the massive 56.7 per cent devaluation of 12th May,1972 must have made a vast impact. It can, however, be seen from Table II above that the effect was rather opposite. The imports grew by 67.56 per cent in 1973-74 as compared to the previous fiscal 1972-73. In the subsequent fiscal 1974-75 too, the imports grew substantially by 41.59 per cent. It appears that the growth in imports during these years cannot be co-related to the exchange rate change.
In fact, these are the years which immediately followed the dismemberment of the country and many a goods which used to come from the erstwhile East Pakistan which did not fall under the orbit of the external trade had by then entered into the international trade abnormally increasing the quantum of imports. In subsequent years, the import growth normalised at 13-14 per cent with the exception of 1978-79 and 1979-80 when the growth was on the higher side. These are perhaps the years when we had commenced fighting the war in Afghanistan which may have increased the needs for imported items.
As for exports, some people think that the devaluation-even if it does not increase exports- helps in containing the same at a given level. The data given in Table II suggests that the fixed rate regime did not put any significant dent in the quantum of exports. Out of a decade, exports fell during 1974-75 and 1981-82 only. 1978-79, 1979-80, 1981-81 were the continuous years when we achieved export growth which was not seen even in the two decades of the fluctuating exchange regime.
It is interesting to note that the exports during 9 year fixed exchange period rose from $766 million (1972-73) to $2319 million (1981-82) ie by 202.74 which gives yearly average growth rate of 22.52 per cent. During the fluctuating exchange rate period, the exports remained stagnant during 1983-84 and 1984-85 as the same moved from $2319 million in 1981-82 to merely $2.457 billion in 1984-85.
If we take account of 20 years, exports rose from $2.457 billion (1984-85) to $14.450 billion (2004-05) ie by 488.11 per cent which gives the yearly average of 24.4 per cent. Thus, what the country significantly achieved in the export sector by sharply devaluing the Rupee by 83.32 per cent since January, 1982 changing the $-Rupee parity from Rs 9.90 to Rs 59.3576 by the end of June,2005.
It will be seen from the above analysis of the data concerning over three decades that no direct co-relation can be established between devaluation of the Rupee and increase/decrease in the exports/imports nor could the devaluation remove the trade imbalance. The position viz-a-viz the invisibles- where inflow on account of the workers' remittances is a major component- did also not depict the satisfactory position as the quantum of yearly remittances hovered around $1 -1.5 billion during most the years in these decades. It was only during early years of General Zia-ul-Haque regime and in the aftermath of 9/11 when the governments in America and a few middle eastern countries took anti money-laundering measures which affected transactions taking place through hundi/hawala and the remittances through official banking channels increased. But it appears that these remittances now hovering slightly over 4 billion dollar a year have reached a saturation point. The Rupee devaluation may not bring any significant jump in such remittances.
Thus as in the past, the pink pill treatment of bringing the balance in the external account by means of devaluing the Rupee is most likely to prove a far-fetched dream in future also. It will rather bring more imported inflation and may prove to be a dangerous proposition in the current scenario of ascending prices of the petroleum products [ which raises the prices of practically every commodity much beyond its effect calculated by the economic managers ] and the recent sugar crisis.
One argument put forward by the proponents of "overvalued Rupee" is that it benefits the importers as if all imports are made by the importers for their own use. The fact of the matter, however, is that if the landed Rupee cost of the imported commodity is less, the benefit by and large- if not fully- gets passed on to the eventual consumers while the Rupee devaluation passes on the imported inflation to the entire nation and needs to be avoided without worrying much about the "excessive Rupee stability".