Euro’s woes

The euro’s slide against the dollar has ignited fears of a currency war, analysts maintain though some argue that countries are proactively intervening in the marketplace to weaken their currency with the objective of improving exports, while others aver that the euro-dollar rates reflect market conditions.

Is the dollar/euro parity determined by a free float or a managed float is the question. The loss in euro-dollar parity in recent months is attributable to a market perception that the dollar would improve in value on the basis of improved US economic data, the expectation that the Federal Reserve may raise interest rates in the current year or the perception that the bailout packages that the European Central Bank (ECB) remains engaged in as a policy decision to support a recession-ridden Eurozone countries will automatically devalue the euro. And finally, the Greek debt crisis has and continues to play a role in the eroding euro value with fears that the Greek government may not be able to deliver on its reform agenda. The weaker euro has promoted European exports to the US, fuelled the continent’s export-oriented industry, thereby generating more jobs and lowering the rate of inflation.

Or in other words, the positive impact of a weaker currency is patently evident on exports as well as enhanced tourism dollars – an impact that is acknowledged by nearly all competing economic theories. This is not to say that a strong currency does not reflect strong growth, including a well-performing stock market attracting portfolio investment; however, the Federal Reserve would then carefully monitor the situation to ensure that a boom in the market is not accompanied by higher inflation and a speculative bubble. To counter this perception the Federal Reserve is likely to raise interest rates, a contractionary policy designed to temper inflationary pressures while keeping the economy lubricated.

Insofar as Pakistan is concerned, it is extremely unfortunate that the current economic team led by Federal Finance Minister Ishaq Dar has followed a policy designed to keep the rupee at around 100 to the dollar through market interventions – a policy that is reportedly fully supported by Prime Minister Nawaz Sharif. The rationale employed for this obviously flawed economic thinking is that a strong rupee reflects a strong economy as well as understates the external indebtedness that has risen significantly during the past two years – be it through procuring loans at Libor plus from the multilaterals or through capital market transactions including issuance of three billion dollar worth of Eurobonds and sukuk at rates well above the international marketplace. Over-valuation of the rupee is widely regarded as a policy that is one of the major reasons for a steady percentage decline in our exports. At present independent economists as well as international donor agencies reckon that our rupee is overvalued to the tune of 15 percent – a claim denied by the government.

Be that as it may, it is disturbing to note that irrespective of the grant of the time-bound GSP plus status for Pakistan effective January 2014 Pakistan’s total textile exports have declined by 1.1 percent. Value-added textile exports benefited from the grant of the GSP plus status; for example, bed-wear exports rose by 12.6 percent, readymade garments by 14.4 percent and made up articles by 26.8 percent; however, raw cotton declined by a negative 7.6 percent, cotton yarn by a negative 22.5 percent, art silk and textile by a negative 13.6 percent and cotton cloth by a negative 10.4 percent. Total exports declined by a negative 2 percent in July-December 2014-15 compared to the comparable period of the year before. And while law and order and energy shortages did play a role in the loss of clients by many an exporter, the delays in the sales tax refunds as well as outstanding claims of exporters on SBP yet the overvalued rupee had a major role in reducing the export growth rate.

There is, therefore, an urgent need for the economic team to revisit its thinking on over-valuing the rupee as it is losing our exporters their clients and a client once lost is difficult to woo again.