Devaluation mantra

LAHORE: It seems that the regular decline in rupee value is part of a greater plan to boost exports and curb imports. This perhaps is the reason that the central bank is not making any effort to stop the downslide.

It may be noted that the imports are still much higher than exports from Pakistan, which is putting pressure on the rupee. The exports, which account for 60 percent textiles, are suffering on two counts.

First is the high cost of doing business, particularly the steep rise in power and energy tariff. These two inputs are major input costs for basic textile units that supply the basic raw materials to the value-added garment and knitwear sectors.

The impact of power tariff on value-added units is relatively small. Under the IMF agreement, the government is committed not to give any subsidy to exporting sectors and this includes power and energy subsidies that were available to major exporting sectors till June 2023.

However, the devaluation of rupee gives exporters, particularly textile exporters’ an advantage in labour cost. All inputs consumed in exports are calculated in dollars terms. An average spinning mill employs 600 workers, while an average readymade garment or knitwear unit employs 1,500-2,000 workers.

When the minimum wage in Pakistan was increased to Rs32,000 per month, the dollar was hovering at Rs285 in June 2023. At this rate Pakistani exporters were paying $112.28 to their workers.

Now that the dollar rate has jumped to Rs300 they are paying minimum wage equivalent to 106.6 per worker. They are enjoying an advantage of $5.68 per worker, which in rupee terms comes to Rs1,704 per worker per month.

This way a spinning mill with 600 workers is saving Rs1.02 million in salaries per month. An apparel unit with 1,500 workers would be saving Rs2.55 million in worker’s salary head per month.

Some experts say that the rupee would be allowed to depreciate further as saving of Rs1 million for the spinning mills under salary head is not enough to compensate for rise in power tariff.

For the value-added sector, Rs2.55 million monthly saving is enough to restore their competitiveness.

According to some, the rupee will depreciate to Rs315 against the dollar in a month or so and settle finally at Rs350 against the greenback by the end of this fiscal year.

Workers monthly salary in terms of dollars would be $101.5 in case a dollar depreciates to Rs315 and to $91.2 in case the rupee value declines to Rs350. In both these scenarios, the textile sectors would save enough to compensate for increase in the power and energy rates.

The increase in dollar value would substantially curb imports as well. Consumers in Pakistan would not be able to afford imported stuff.

Even the affluent middle class would totally stop buying imported goods. Only the 5 percent richest segment enjoy imported stuff, which even at current government levies is extremely expensive. With decline in rupee value the prices would soar further.

Our current economic situation is so precarious that there seems to be no other way to revive the exports and curb imports. As a result, local industry may get a boost and create jobs. Recent policy would no doubt bring a lot of misery for the masses, but most of us would learn living within our means.