ISLAMABAD: The recent currency depreciation is good for the exports as they would get theoretically more cushion; therefore cash rebate in textile package must be utilized swiftly to benefit from rupee devaluation. Exports would benefit more; however, imports may not fall much..
Moreover there is intense competition between exports and imports because ours is a buyer market therefore and seller will have to share part of increased margins and imported raw materials will also partially nullify the gains.
The good news is that it won’t bring too much imported inflation and in turn its adverse impact on growth through demand adjustment would not be much. There will, however, be some price increase in automobiles, energy and few other sectors. And imports in these sectors might take a dip.
“Apart from manufacturing exports” a source privy to Secretary Commerce told Customs Today that it was high time to get rid of wheat and sugar surpluses lying for years before they get rotten. The subsidy requirement would be reduced.
The source told that devaluation was undertaken as a mean of correcting a deficit in trade balance and the balance of payments; it raised the domestic price of imports and reduced the foreign price of exports. It is common to find arguments for and against devaluation but the issue is to find the effects of devaluation in terms of trade, as devaluation lowers the prices of exports and raises the prices of imports.
“A necessary and sufficient condition for an improvement in the trade balance is a combination of a sufficiently large price elasticity of demand and a sufficiently small price elasticity of supply” the source added saying that devaluation would be implemented to encourage the exports and to improve the trade balance and also to reduce the real exchange rate appreciation in short run.
“In short and long run” the source said that a real devaluation of currency improved the trade balance in the less developed countries like Pakistan. Devaluation improve the trade balance and there is a long run relationship between real effective exchange rates and the trade balance using bound testing co-integration approach, if the trade balance is used as a dependent variable.
The source told that Pakistan had been facing the problem of trade deficit since its creation in 1947 and to improve the trade balance, Pakistan had experienced a series of devaluation in different periods of time from 1955 to up till now. After 1982 the country is experiencing a continuous devaluation in the rupee against dollar.
The source added that the government tried different exchange rate policies to strengthen the balance of trade and balance of payments (BOP) and keeping in view this frequent appreciation of dollar against other major currencies, government adopted the managed floating exchange rate system in January 1982.
