Debunking the Relationship Between Exports and Currency Devaluation

Shahid Sattar

Any increase in exports is always a function of the elasticity of the inputs that make up the goods exported. These inputs are multifaceted, subject to factors including but not limited to technological advancement, research and development, education and skill level, economies of scale, law and order situation, political stability, and most importantly, competitive advantage in the production of goods. In a recent analysis published on twitter, it was posited that a “favorable exchange rate” explains the increase in export quantity in recent years. However, this analysis fails at many levels, firstly as it is outdated, neglecting to account for the monumental export growth achieved in the past year alone, only considering values up until a certain date in 2020, and secondly by making a false attribution between exports and exchange rate where no clear link is present. Above all, considering a sole factor such as exchange rate results in a unidimensional and therefore fallacious analysis, contrary to which there is extensive literature revealing that the relationship between the indicators of exports and exchange rate is statistically insignificant.

Tweet implying link between exports and exchange rate

Numerous studies cover the theoretical as well as empirical aspects in order to demonstrate the complex relationship that exists between currency level in a country and its trade, making it near to impossible to chalk out a clear causal effect. In one study, Hooper and Kohlhagen (1978) established a trivial and negative association between exchange rate of a country and its trade. Furthermore, all inputs of Pakistan’s exporting sectors are dollar based, including but not limited to raw materials, energy, dyes & chemicals, machinery and spare parts etc, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility, thereby providing an unwavering and secure economic and investment climate. Being a developing country with a high inflation rate, Pakistan implements full dollarization for its industrial imports. This itself refutes the concept of debilitating exchange rates affecting the trade of the country.

In FY21, Pakistan’s goods and services exports amounted to nearly $31 billion. This growth was shown to be aided mainly by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth. As an example, Bangladesh’s export-oriented industry benefits from unwavering government support, competitive energy and exemplary DLTL system which strengthens its exporting industry as the mainstay of the economy. This is why the economy of Bangladesh is now ranked the fastest growing in the world, in stark contrast to Pakistan’s case where government support for industry is deemed to be a “subsidy.” To the contrary, a subsidy is defined as financial aid or support in order to bring costs below the market rate, while the exporting sector in Pakistan flounders to obtain the very basic market rate and nothing below that.

The tweet author questions “subsidies” to exporters and falsely attributes growth to exchange rate.

Competitive energy rates are not subsidies; they are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation. However, recent policy instability threatens to reverse the industry’s progress. It is critical to prevent this from happening, by continuing the provision of energy at regionally competitive tariff rates, for the country’s long-term economic stability and GDP growth. Even with these minimum requirements, Pakistan’s export based industry is far from achieving the necessary upgradation and innovation. Systemic inefficiencies, administrative delays, and ever increasing cost of doing business all have contributed to an unsustainable business environment, and each of these factors must be considered each time there is talk of export numbers.

Pakistan relies on very limited items for its exports, rendering its export base very narrow with a focus on low value-added products. These include products related to textiles, agriculture, pharma sector etc. These prominent categories of exports contribute to more than 70% of total exports with textile exports solely contributing more than 60%. Pakistan has not increased its export base as it lags behind in terms of product diversification, with narrow market capture and a low-tech based production competing against constantly evolving global players. This signifies that a factor like exchange rate has no significant effect on a narrow base export economy like Pakistan, a point emphasized previously in a study by the National Tariff Commission of Pakistan, titled Impact of Exchange Rate on Pakistan’s Exports.

It is important to note that prior to any assessment of the impact of exchange rate depreciation on exports, imports and employment, one must consider the overall state of the country’s economy and policies. The rupee plunged over 58 percent against dollar in 2021 as compared to 2015 on average (from Rs 103 to Rs 163). Following this currency devaluation, the cost of doing business rose due to increasing prices of energy, raw materials and freight. This devaluation served as beneficial for one group in particular: domestic producers such as cotton farmers, who benefited from both the devaluation of currency and the rise in international prices of cotton. In the last season, cotton farmers were paid Rs 400 billion additional payments on account of higher international cotton prices.

The export sector experienced a period of stagnancy up until recently, as the costs of doing business far outweighed government support, leading to an unsustainable environment for export-led growth. The costs of doing business were racked up by persistent issues in pending refunds of exporters (some of which still remain pending), load shedding, high energy costs, high interest rates, all of which reversed any supposed positive impact of rupee devaluation.

Three primary factors influence the impact of depreciation on external trade and related sectors. Domestic pricing, inflation in other countries and macroeconomic conditions and policies during the devaluation phase. The first two components determine the real effective exchange rate and external competitiveness. The nature of exports and imports, as well as export capability, determine the benefits. The amount of depreciation that contributes to greater economic activity and hence increased export capacity is determined by macroeconomic conditions and policy. The profits from depreciation would be compromised if any of these aspects were lacking.

There was no rupee depreciation during the PMLN’s tenure when inflation was low. Even a small depreciation of rupee then could have effectively lowered the exchange rate. The damage in terms of low exports had been set in motion when the rupee began to fall in 2018 with the change in government. Similarly, the problem with the Balance of Payments started to get out of hand and the state of the economy began to deteriorate. Following that, the country implemented contractionary policies. To combat inflation and attract foreign money to manage FX holdings, the interest rate was increased from 6.5 percent (in May 2018) to 13.25 percent (from July 2019 to March 2020), followed by a COVID-19 reversal. After July 2019, the government began implementing the IMF’s expanded strategy, which includes lowering subsidies, hiking energy and petroleum costs, and raising interest rates, inter alia.

Slow economic growth, high inflation, a decade-high interest rate, and rising energy prices have all contributed to higher production costs, lowering any supposed gains from impulsive devaluation. The private sector’s ability to simulate economic development and increase investment has been limited as a result of the high interest rate. Any benefits of depreciation in recent years were outweighed by the economic downturn and rising production costs. Overall goods and services exports in FY20 were $ 28 billion, down from $ 30.62 billion in FY18 and $ 30.22 billion in FY19, according to data from the State Bank of Pakistan. Despite the depreciation of the rupee, Pakistan’s exports fell in 2020, which is testament to the fact that there is no link between the two.

Indisputable Link Between Competitive Energy and Export Growth

Shahid Sattar

A reliable and supportive energy environment is a critical component of industrial competitiveness, without which the risks of premature deindustrialization abound. The export momentum achieved in the past two years, particularly through the substantial contribution by the textile sector with supportive government policy, must not be taken for granted. It is unfortunate that the evident results of consistent and supportive energy policies to exporters are being negated and the significance of textile-led export growth for Pakistan’s economy is being undermined.
Providing exporters with the bare minimum requirement of competitive energy is indispensable for sustained economic growth, yet criticism is being levelled that the industry demands subsidies that do not correlate with export growth. What have been criticized as “handouts” are in fact the basic needs for the industry to remain competitive, and the governments of our regional competitors ensure that their industries remain supported with these minimum requirements so that exports and therefore economies can prosper. Furthermore, the independent study that is being touted as evidence against the link between competitive energy and export growth is not based in fact, authored by those with no experience in the field, and using outdated information as it fails to take into consideration the past 3 years.

The cost of regionally competitive energy is less than 2% of the average return that exports bring to Pakistan’s economy. This is valuable foreign exchange that does not have to be repaid or serviced at high interest rates. With textile mills facing closure in Punjab due to the government’s suspension of energy supply over the past month, about 80% of industry operations were in danger of being brought to a complete halt. There remains intense competition among regional textile exporters, so a minor cost difference in relative terms brings an exponential impact on the international market. Furthermore, the recent export momentum has been instrumental in attracting manifold investments, supporting the industry in expansion while it inches closer to the target of $21 billion exports in FY22.
Textile units in Pakistan are incurring power and energy costs 2.4 percentage points more than India and 7.8 percentage points higher than Bangladesh. Research has demonstrated that the ideal, regionally competitive electricity tariff would be around 7.4 cents/kWh.
SNGPL is currently supplying up to 70 mmcfd to non-export processing industry including steel, ceramics and glass. It is inexplicable to not give priority to exporting sectors, given the multiplier effect of supplying them with competitive energy. Furthermore, the extreme economic urgency of supporting the Balance of Payments needs to be catered to rather than supplying RLNG/ Gas to non-export sectors while exporters are disconnected. This is an alarming state of affairs when the Current Account Deficit has been at an all-time high of $ 7.089 during the first five months of FY22.
The total consumption of captive and Co-generation was 180 to 200 mmcfd and 160 mmcfd just prior to 15th December 2021. SNGPL and APTMA agreed that 75 mmcfd gas will be provided for the winter months, which is about 35% of gas load which is absolutely essential to maintain production, without considering viability. Factories which had generated steam from coal or fuel oil prior to 2015 have restarted their boilers in order to keep production going and not default on export orders. This is despite the fact that this method of steam generation is extremely uneconomic, and plants established after 2015 have no such back up facilities and therefore cannot operate.
Scenarios where this gas is necessary to run units include:
1. Factories that do not have full grid load and are awaiting an extension of load.
2. Electronic-sensitive machines that cannot run on grid power.
3. Factories reliant on steam made from generator waste heat recovery boilers (cogeneration) for their dyeing plants/ weaving & knitting machines.
Major electric shutdowns present the industry with a troublesome situation, as witnessed on 15 December when 80% of Punjab industry was shut down. The industry was forced to shift to Grid Supply, from which it had earlier on shifted to gas fired power plants on account of sub-standard supply after expending huge sums / large investments. Immediately following the gas cut, the grid failed in central Punjab and the industry was without any power for 12 to 20 hours at a stretch. The interruptions continue to date.
On the other hand, as the existing sanctioned electricity loads were much less than the requirements, with as many as 129 cases relating to applications for new connections, extensions of load, capacity enhancement were pending, the gas disruption resulted in a significant loss of textile manufacturing capacity, calculated to be over 20-25 % of the total. In many cases, the payments made have been awaiting action for over 2 years. Strangely, the DISCOs have now taken up maintenance work on its lines leading to unwarranted shutdowns – which further add on to the present supply constraints to the textile value chain. As a consequence, the country has lost over 25% of its textile manufacturing capacity – which will manifest as lowered production and exports from January 2022 onwards.
It is important to note that the contribution of LSM to Pakistan’s total manufacturing is 78%, while it contributes 9.5% to the GDP and 12.6% to the labor force. Unfortunately, the sector has been witnessing a decline for the past couple of years. According to a Tribune article titled Slowdown in LSM Growth Persists, growth in large-scale manufacturing (LSM) industries slowed down to 3.6% during the first four months (July-October) of the current fiscal year. Over time, the government’s policies for energy, as well as monetary policy and currency depreciation have contributed to an unsuitable environment for industries and heightened the cost of doing business.
Textiles, of which over 20% of the LSM index is comprised, was among those sectors that posted growth in the first four months of the current fiscal year. Any factor that has a bearing on textile sector operations significantly impacts overall LSM growth, with spillover effects on revenue and job creation. However, the evident link between these factors is denied time and again despite the multiplier effect of supplying regionally competitive energy to industries
For the current fiscal year, the government has set the economic growth target at 4.8%. However, the IMF projected that Pakistan’s economic growth would remain around 4% – about half of what is required to create enough jobs keeping our youth bulge in mind. This is an unavoidable circumstance of the strong anti-export/anti-manufacturing bias in government policies. The trade regime lacks transparency and is one of the most inward oriented in the region. Furthermore, infrastructure investment and allocation have been skewed in favor of consumption rather than manufacturing and exporting industries. It is therefore no surprise that our industrialization has been the lowest among other developing countries over the past 40 years.

The unsuitable environment for businesses in Pakistan has resulted in liquidity crises and reduced overall profitability. Furthermore, tariff and non-tariff barriers discourage import of quality raw materials for better output while also making production regionally noncompetitive. Numerous schemes have been made available over the years to streamline access to imported inputs at world prices, but these are largely ineffective. Only about 2% of textile and apparel exporters in Pakistan can access duty suspension schemes for their imported intermediates, in contrast to 90% in Bangladesh, where export-led economic growth has been exemplary.
A reliable and supportive energy environment paired with more efficient use of monetary policy and customs tariff can largely improve industrial competitiveness and reverse what appears to be the beginning of Pakistan’s premature deindustrialization. In Pakistan’s case, there is laggard advancement in the tertiary sector, as technological upgradation or advancement have not accompanied our LSM contraction. Instead, poor policies, mismanaged resources, a growing trade deficit and borrowing without planning for sustainable growth in complementary sectors has given rise to deindustrialization.
In order to prevent premature deindustrialization, Pakistan’s government must provide adequate support to the manufacturing and exporting sectors, thereby allowing them to attract investment and steer economic growth while also creating new economic and industrial zones for innovation and entrepreneurial opportunities. Regionally competitive energy, supportive schemes for importing machinery, and a structured technology upgrading framework embedded in industrial policy are the bare minimum for exporters, and a strong, supported industry has proven time and again to be the only force that can bring Pakistan out of its current account deficit and out of the clutches of IMF loans.

Shahid Sattar and Amna Urooj

The role of women in any societal setup has remained a crucial pre-requisite for not only the economic, social, political uplifting of that particular society but also contributes to the general progression globally. However, coupled with this fact is the unfortunate existence of the notion that impedes women from gaining the aforementioned emancipation. This can be encapsulated by the fact that half (49.2%) of Pakistan’s population remains underutilized regardless of a huge stockpiled economic as well as social progression potential in them. This bisected population is a representation of the Pakistani females that practically remain majorly out of the policy equation of the country in all spheres.

In order to acquire a well-informed analysis of the contemporary situation of women empowerment in Pakistan, it is pertinent to highlight some important statistical aspects in this regard. These range from Economic Participation of the women to their health and well-being. According to The Global Gender Gap Report 2020 by The World Economic Forum, the Global Gender Gap Economic Participation and Opportunity reflected a value of only one quarter of Pakistani women participating in the workforce i.e. employed or looking forward to be employed. On the contrary 85% of Pakistani men are involved economically. Likewise, only 18% of the labor income goes to the women in Pakistan (World Bank, 2020). Moreover, the similar statistics for Bangladesh, being the best performer in South Asia, stand at a rate of 38% of women actively participating in the labor force in 2018. Furthermore, it can be noted that the annual GDP per capita growth rate of Bangladesh in 2020 was 1.35% whereas for Pakistan it stood at a rate of -1.44% for the same year (World Bank). This capitulates the stark difference between the economic participation and opportunities available for the women vis à vis the economic growth rate in return of that as can be seen below.

GDP per capita growth (annual %) – Pakistan, Bangladesh

Source: World Bank

One of the crucial policy steps taken to empower women in Bangladesh was the provision of microcredit. Various studies have shown the positive impact of microcredits such as it being a significant instrument for the generation of income, development of human resources, poverty reduction and women empowerment (Kessey 2005). Microcredits in Bangladesh strengthened the rights related to the economic decision making in women along with the establishment of a wider law acumen base (Debnath et al., 2019).

Political Empowerment is another central indicator for women empowerment which comprises of leadership roles taken up by women. The World Bank reported in 2020 that only 5% of senior leadership roles are taken up by women in Pakistan which makes it attain a rank of 146 out of 153 countries analyzed by the World Bank in its report. This score is perilous to start from. The political gender gap has however tapered noticeably over the previous two years but yet remains wide, placing Pakistan on the 93^rd position country wise.

Additionally, Education Attainment, also reflects the level of women empowerment for any country. It is very unfortunate for Pakistan that a large number of countries have already or almost evaded the literary gap based upon gender however Pakistan stands still at a 20% figure. What is more appalling is that less than half of the women are illiterate in comparison to 71% of the Pakistani males. Furthermore, the differences in the enrollment across the primary, secondary as well the tertiary education are also stark (World Bank, 2020).

Literacy rate, adult female (% of females ages 15 and above) – Pakistan

Source: World Bank

The combination of feeling content with national setup and functioning well of any nation goes a long way. This typically is crucial for the women – the birth givers and the care takers. Physical and psychological well-being is directly linked to the successful rates on professional, personal as well as inter-personal levels. The Maternal Mortality Ratio (per 100,000 births) stood at 189 in 2019 (Pakistan Maternal Mortality Survey). Moreover, with a burgeoning population and a growth rate of 1.9%, which is turning into an existential crisis, Pakistan’s contraceptive prevalence rate remained sluggish at 34% for women aged 15-49 in 2019 (Ministry of Finance, Pakistan). This makes it the fifth most populous country in the world. A projecting population with other economic issues such as a low GDP growth rate, increasing food insecurity, unemployment and other factors add layers of inefficiency at a national level, crippling the economic as well as the health structures. On the contrary, the population growth rate of Bangladesh remained 1% in 2019 (World Bank). Not only this, their fertility rate stands at a value of 2.3 in 2011 mainly due to availability to and usage of contraceptives to the Bangladeshi females (The Guttmacher Institute, 2011), taking it a step ahead towards becoming a role model in women’s health improvement.

The aforementioned paragraphs depict the contemporary situation of the women in Pakistan which typically is a sad state of affairs for not only the women but the entire nation. The downward trajectory of the indicators mentioned earlier are directly influencing certain national level indicators such as national success, sanity of the nation and finally the happiness of the Pakistanis. These are directly affected by the economic development, rationality and knowledge diaspora and finally social well-being respectively. A positive economic development ensures a national success in the form of economic uplift of the country. In such an uplifting women play an important part being a significant portion of the population just like Bangladesh whereby the women played a major role as a consequence of a liberation of their economic choices and control. Their labor force participation increased tenfold during the year 2003 to 2016. Moreover, their gender wage gap also reduced with an introduction of positive societal perspectives related to women land ownership. Overall result of this turned out to be an increased financial inclusion of the women which had other trickle down effects. The Human Development Index (HDI) of Bangladesh stands at 133th place in 2019 out of 189 countries and territories. However, for Pakistan the HDI value for 2019 stands at a position of 154/189. Similarly, Pakistan ranked 105 out of 149 countries on the Happiness Index (World Happiness Report 2021 by The UN Sustainable Development Solutions Network) whereas Bangladesh ranked 101.

Women emancipation in Pakistan requires curated policy measures in order to move towards making Pakistan a successful, sane and a happy nation. These policy measures revolve around some basic core efforts to improve the indicators involved. The foremost step would be the providence of targeted access to education attainment of higher education in females. This revolves around the notion of personalized solutions problem wise. An increased literacy rate still faces issues when sustainable job pathways for women are not available in alignment with societal gender roles of the females.

Once on the field, the women come across a glass ceiling which simply means an unacknowledged barrier to progression in the profession faced by the females based upon their gender. For a practical emancipation the glass ceiling has to be shattered. This needs subtle efforts from the top tier of the relevant organizations.

The issue of political empowerment can easily be resolved through a more transparent and accountable political system. Laws and policies to ensure substantive women participation in the political arena are well documented, however, the problem lies in their implementation which is hindered by political motives of certain strata of the society.

Most importantly, the women of Pakistan have awaited the awarding of their reproductive rights since a long time now for better health and well-being. Given that they are the life givers and care takers, it is time for the country to prioritize female reproductive health for the nation under the umbrella of basic human rights including but not limited to right to life, a life free from torture, privacy rights, attainment of dignified health and education and finally an educated consent to choose between healthier reproductive alternatives leading to a toned population count for greater benefit thus giving a multiplier effect to the economy. All we need is sincere efforts from policymakers.