Spearhead Special Report – 20.06.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Since December 2017, Pakistan has gone through three bouts of devaluation. Bloomberg has termed the Pakistan Rupee as the worst performing currency of 2018. This then is the legacy of the PML-N government – a weakened currency in the wake of serious macroeconomic imbalances and burgeoning debt. After five years of cosmetic reforms bolstered by incessant borrowing, the country is once again economically threatened and likely to be knocking at the door of the International Monetary Fund (IMF) very soon. Having artificially maintained the value of the Rupee at the Rs.105 level for a prolonged period, we are now facing the specter of drastic devaluation with the projected Rupee value likely to fall to Rs.125 against the US Dollar. That in itself translates into a devaluation of 19 per cent plus within a short span of 7-8 months. The ramifications of such a high level of devaluation are manifold, and the people are likely to be burdened with rising costs and higher inflationary pressures, with minimal spillover benefit in terms of higher Exports, Remittances or Investment.

The oft-repeated argument in favour of devaluation is that it allows Exports to rise. In the last seven decades with multiple rounds of devaluation, the exports from Pakistan have continued to lag imports and the imaginary benefits of devaluation have never really materialized. Devaluation in isolation is no solution – unless the country can build the required systems, create the infrastructure, enhance competitiveness and reduce import dependence. Unfortunately for Pakistan, with high energy costs, myriad obstacles in conducting business, endemic corruption, low level of competitiveness and low level of human capital development, devaluation is but just one component that by itself is insufficient and ineffective for achieving export enhancement.