EDITOR’S PAGE

Rupee decline and its implications for the textile industry

The downward trajectory of Pakistan's rupee has continued in the month of October.

The PKR has lost 12.5% of its value against the greenback since its recent high in May. It has depreciated by 9.5% during the ongoing fiscal year alone, raising concerns over inflation.

The basic problem is the structural gap between exports and imports and the underlying factors responsible for this trade deficit. The flexible market-based exchange rate regime was introduced by the central bank in June 2019. Under this regime, the SBP does not suppress an underlying trend in the exchange rate and any interventions are limited to address disorderly market conditions.

Flexible exchange rate ideally should could enhance the competitive advantage of a country and can increase exports significantly while discouraging imports.

However, the government has come under criticism over the recent rupee depreciation with the opposition stating that this has affected the common person who has had to deal with higher inflation.

CPI inflation already hit a three-month high at 9% in September 2021, up from 8.4% in August and expected to rise even higher. The CPI has averaged 8.6% for the first quarter (July-September) of the ongoing fiscal year.

The argument against a flexible exchange system is that a developing country such as Pakistan needs stable currency to ensure growth in the economy. The gains from devaluation are expected to be short term and detrimental to the economy. The imports when they are in the form of essential items such as petroleum and the raw material are not affected by a devalued currency. That is why the current account deficit keeps on increasign despite the Pakistani Rupee having gone through record breaking devaluation in the last four years.

It is fime to pay atetntion to the fundamentals before blaming the currency exchange as a reason for the economic woes. Our exports are already facing a decline in terms of quantity.

The stability of the exchange rate depends on the exchange rate management. The managed floating exchange rate may ensure stability but consequently lower the foreign exchange reserves of Pakistan. While marketbased flexible exchange rate may not turn up stability unless exports and imports of goods and services did not align. Currently, imports outstrip exports and the value of imports of Pakistan is two-fold exports, which are witnessed by the higher trade deficit. A reduction in the trade deficit over time is required because remittances are not sufficient to feed the widening gap of the trade deficit. Policy measures are needed to tackle the trade deficit in order to achieve exchange rate stability and ensuring long-run economic growth.

Established 1951

October 2021 Dyeing, Printing and Finishing II

October 2021.