Attiya
In the realm of economic measures, currency devaluation is a commonly employed tool to address trade balance deficits. Developing countries, like Pakistan, deliberately devalue their domestic currency to adjust exchange rates and control the deficit. Devaluation promotes exports and curtails imports, making traded goods more affordable for foreign markets. Scholars such as Alse, Oskooee, and Narayan have discussed the effects of devaluation on the trade balance, recognizing its potential short-term benefits. Pakistan has experienced a trade deficit and has resorted to devaluation in recent years. The primary objective of currency devaluation is to address persistent deficits, resulting in adjustments to the general price of traded goods and the creation of surplus money to restore real balances. This surplus stimulates net exports and improves the current account. Notably, Pakistan’s current account deficit (CAD) decreased to $0.1 billion in February 2023 compared to $0.5 billion in February 2022. Collectively, CAD fell to $3.9 billion in the period of July-February 2023, a decline from $12.1 billion in the same period of FY22. (Source: Business Recorder, 2023)
Throughout Pakistan’s history, the currency has experienced multiple devaluations, each with its own implications. In the 1950s, when Pakistan’s exports were declining, 30 percent currency depreciation resulted in a 45 percent improvement in exports. In 1972, the devaluation of the currency led to a surplus in the balance of payments. In 2013, Pakistan faced a precarious situation with imports totaling around $48 billion, remittances at approximately $13 billion, and foreign exchange reserves of about $6 billion. The political government artificially maintained the rupee-dollar exchange rates between 100-110, depleting the reserves of the State Bank of Pakistan and reducing them to around $9 billion.The succeeding government faced a decline in reserves to about $28 billion, with foreign reserves surpassing $23 billion. The previous government had left Pakistan with a current account deficit.
In 2023, Hafiz Pasha highlighted the intense inflationary phase of Pakistan’s economy. The high valuation of the rupee adversely affected the economy, impacting foreign remittances and exports. Exports in Pakistan reached $23.174 billion in 2022-23 but experienced a decline of 11.71 percent in April 2021-20 (Tahir Amin, 2023). The impact of devaluation on the trade balance and currency depreciation can have long-term effects, with internal demand playing a role in trade disturbances (Sajad Ahmad Bhat et al., 2020).
The devaluation of the Pakistani rupee can be attributed to several factors. Firstly, the country’s trade imbalance, where imports exceed exports, puts pressure on the value of the rupee as more foreign currency is required to pay for imports than is earned from exports. This trade imbalance leads to the devaluation of the rupee (State Bank of Pakistan, 2023).
Political instability in Pakistan also contributes to the devaluation of the rupee. Uncertainty about the country’s political future can result in a lack of confidence among foreign investors, causing them to withdraw their funds. This decreases the demand for the Pakistani rupee and leads to its devaluation. Additionally, the interest rate differential between Pakistan and the United States affects the rupee’s value. When interest rates in the US rise, investors may choose to move their funds to the US for higher returns, reducing the demand for the Pakistani rupee (Business Recorder, 2023).
Furthermore, the lack of foreign investment in Pakistan contributes to the devaluation of the rupee. Foreign investment plays a crucial role in financing the country’s economic growth. When there is a decline in foreign investment, the demand for the rupee decreases, causing its value to decline relative to the US dollar (Business Recorder, 2023).
Moreover, Pakistan’s current account deficit, which was approximately $0.5 billion in 2022, accounting for about 4.6% of GDP, also affects the value of the rupee. A deficit in the current account indicates an outflow of foreign currency, putting pressure on the rupee’s value (State Bank of Pakistan, 2023). Additionally, factors such as political instability affecting foreign remittances and smuggling of dollars to neighboring Afghanistan also impact the availability of foreign currency within the country (Business Recorder, 2023).Taken together, these factors contribute to the devaluation of the Pakistani rupee, affecting the country’s economy and trade.
The devaluation of the currency in Pakistan can bring several advantages to the country’s economy. While devaluation may initially lead to certain challenges, such as increased import costs and inflationary pressures, it can also offer significant benefits in the long run. Here are some advantages of currency devaluation in Pakistan like, Boosting Export Competitiveness, Reducing Trade Deficit, Attracting Foreign Investment, Boosting the Tourism and Services Sector:
It is important to note that currency devaluation should be managed carefully to mitigate any adverse effects, such as inflation. Effective policies and measures should be implemented to ensure that the benefits of devaluation are effectively channeled into sustainable economic growth, job creation, and development.
The devaluation of the Pakistani currency can also bring about certain disadvantages and challenges for the country’s economy. While devaluation may offer short-term benefits, it is essential to consider its potential negative consequences. Here are some disadvantages of currency devaluation in Pakistan:
Inflationary Pressures, Higher Import Costs, Debt Burden,Negative Impact on Standard of Living.It is crucial for policymakers to implement comprehensive strategies to mitigate the potential disadvantages of currency devaluation. Measures such as controlling inflation, promoting domestic production and investment, and diversifying the export base, help minimize the negative impacts and ensure a balanced approach to currency management.
The devaluation of the Pakistani rupee has a significant impact on local trade within the country like Boost to Export Competitiveness, Increased Export Earnings, Import Substitution, Increased Demand for Local Products. The devaluation of the rupee can act as a catalyst for promoting domestic consumption and supporting the “Buy Made in Pakistan” initiative.
Overall, the impact of currency devaluation on local trade in Pakistan is a mixed bag. While it can provide benefits to exporters and boost competitiveness, it may also pose challenges for importers and contribute to inflationary pressures. Effective policy measures and a balanced approach to currency management are crucial to harnessing the advantages of devaluation while mitigating its potential negative effects on local trade and the broader economy.
To mitigate the disadvantages of the devaluation of the Pakistani currency, several measures can be taken to support local trade and the overall economy:
Development of Special Economic Zones (SEZs): Encourage major investments from countries like China and others in SEZs that focus on export-oriented industries. This approach will stimulate export growth and attract foreign direct investment, leading to job creation and technology transfer.Infrastructure Development by Investingand improving the infrastructure surrounding SEZs and industrial areas. Upgrading transportation networks, logistics, and supply chain systems, and ensuring reliable power and water supply will enhance the efficiency of production and export processes.Discouraging Hoarding: Regulate and monitor hoarding activities to prevent artificial scarcity and price inflation. Boosting Foreign Remittances: Promote mechanisms for overseas Pakistanis to send remittances back home.Focus on reducing unnecessary imports while ensuring the availability of essential goods. Analyze import patterns, prioritize domestic production, and support local industries to meet the country’s basic needs. This will reduce dependence on imports and strengthen self-sufficiency.
Prudent Fiscal Policies: Shift away from a debt-driven economy and adopt prudent fiscal policies to reduce budget deficits and promote savings. Encouraging investment in productive sectors will lead to sustainable economic growth and reduce reliance on external funding sources.Exploring the alternative trade arrangements, such as barter agreements, to obtain goods and resources at more favorable terms. This can reduce dependence on conventional trading routes and provide cost advantages for businesses, ultimately contributing to economic growth. Finally, encouraging investment by creating an investor-friendly environment by implementing policies, incentives, and favorable business conditions to attract both domestic and foreign investment.
By implementing these measures, Pakistan can mitigate the disadvantages of currency devaluation and foster a resilient economy that promotes stability, growth, and prosperity for its people.
The writer is a Civil Servant and a Chevening Scholar. She can be reached at [email protected]