Impact of PKR depreciation on exports

January 10, 2019

Impact of PKR depreciation on exports

January 10, 2019

Impact of PKR depreciation on exports
Shahid Sattar
“Business Recorder”
January 10, 2019
In contemporary economics, it is believed that currency devaluation directly translates into enhanced exports. This is not the case as the increase in exports is always a function of the elasticity of the inputs that make up the goods exported. Pakistani currency has devalued enormously but many will plausibly argue that our exports have not yet seen a resultant increase. Taking the example of Pakistan’s largest export sector textiles which was able to rise around nine percent to $13.53 billion for the fiscal year 2018 ended June 30 while Rupee lost around 20 percent against the US dollar since December 2017 to the fiscal year end.
In Pakistan, a 6 percent currency depreciation from Aug17-March18 was followed by 10pc increase in exports. But unfortunately later depreciation of almost 20pc from March to November 2018 has not yielded any positive results in terms of export improvement.
The explanation to the above mentioned imbalance in the equation can be derived from several factors that are: 1) overvalued currency for extended period before recent devaluation, 2) increase in raw material import cost post devaluation that has increased product price, 3) energy price of RLNG that is supplied to industries being pegged with dollar which has gained weight against our rupee, and to some extent the inefficiency of the export industry.
It is an established fact that Pakistani currency has remained overvalued for the last many years which has hurt the entire export sector, including textile exports. The policy of pegging rupee to a fixed 100/US dollar left industry uncompetitive internationally as well as domestically as imported products were artificially kept cheaper due to over-valuation. This is evidenced in an immense increase in countrywide imports to more than $50 billion, while exports fell to $20 billion. Now that the currency is heading towards its actual value, the results of this devaluation will start showing in export numbers in times to come.
Dissecting textile and clothing export sector of Pakistan, all the factors hold merit and each factor has been separately analyzed. Most of the input factors are dollar denominated, so any increase in currency exchange rates inflate the input prices and the inflated cost of doing business offset the positive impact of devaluation on exports. Resultantly exports stay stagnant and do not increase as much as they should after currency devaluation due to their low elasticity, which means a lot more needs to be done to reach export target. In a highly competitive low margin industry to expect anything different would not be fair.
Textile sector’s basic raw material cotton and manmade fibre are majorly imported. Pakistani market cotton spot rates are directly linked to New York cotton rates, which mostly means if the dollar’s value increase resultantly even our domestic cotton rate increases with it. In addition to that, this year our cotton production remained just around 9.9 million bales against its target of 14 million bales, while the domestic demand is almost 15 million bales. This leaves a shortfall of more than 5 million bales which has to be imported at devalued currency along with 11% duty on import of raw cotton. The import duty on manmade fibre polyester reaches up to 20% which increases input costs of the textile sector and denies 70% of the world export market to Pakistani products. In fact our textile imports are increasingly turning towards MMF apparel and given the duty structure Pakistani manufacturers are even losing domestic market share.
In addition to raw materials, the energy cost of production accounts for almost 30% of total processing
cost in textile industry. Pakistani energy rates for both electricity and gas provided to industries have remained well above against our regionally competitive countries, predisposing Pakistani exports to a disadvantaged position in international market. Re-Liquefied Natural Gas (RLNG) is supplied to industry which is directly linked to Brent (dollar component). A year on cost analysis of RLNG reveals that on 31st January 2018, the notified rates of RLNG by SNPGL were Rs 1112 ($ 10.79; $=Rs 103) per MMBTU. On 31st December 2018, it was Rs 1770 ($12.73; $=Rs 139) per MMBTU (Source: Ogra). Hence, an increase of 59% was witnessed due to devaluation of currency accounting for 59% increase in 30% cost in just within a year. Other than the automatically infused increased cost of doing business owing to devaluation of currency, the imprudent government policies on the domestic front remains the major reason for dismal textile export performance. As many as 125 textile mills closed down in last 2 years due to high cost of doing business, uncompetitive energy prices for many years, loss of liquidity and squeezed cash flows due to stuck-up refunds/rebates with the government and low profit margins in textile sector. The current scenario is that the refunds held by government far exceed the profit margins created by the textile industry.
The textile mills that remained in business after seeing the crunch were unable to sustain and upgrade machinery through fresh investment in production processes. Investments are made when cash surpluses are created, textile sector efficiency didn’t improve since there were no surplus created to invest back in innovation and technology up-gradation. Let alone up-gradation and innovation, Industrialists tried to survive utilizing all their resources and credit lines just to keep their factories running. Systemic inefficiencies, administrative delays, ever increasing cost of doing business in the country has led to downfall of once an efficient textile industry.
Now that the new PTI government has taken prudent policy measures and is committed to implementing export-led growth strategy, results will start showing in the coming months. It will take time to create surpluses for fresh investment in the sector and exports to reach a 45 billion target over next five years but now it can be stated that Pakistan is certainly moving in the right direction.


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