Dollar Demons

It has become increasingly important for Pakistan to increase its level of integration into the regional and global markets and focus on improving the capabilities and capacity of the exporters.

By Dr. Aadil Nakhoda | October 2023

A key condition of the $3bn SBA, signed in July, relates to the market-determined exchange rate. However, the increasing difference between the interbank and open market rates of the dollar has thrown up a challenge for the Pakistan Government as the Standby Arrangement (SBA) with the IMF requires it to keep the differential down to 1.25 per cent. The differential soared to more than 5 per cent. However, this difference was said to be tackled with different administrative measures to control the outflow and the demand of dollars. Continuing pressure on the rupee as the economic challenges surmount results in instability in the exchange rate. Unfortunately, the instability in the currency rate creates economic uncertainty that has implications for the different stakeholders.

As Pakistan continues to face challenges on the external economic front, policies must be adopted to ensure that exporters earn dollar-based revenue to reduce the pressures on the rupee. Although remittances contribute significantly to the much-needed dollar inflows, increasing exports via improvement in productivity levels should be the top priority, as higher exports will generate foreign exchange, create jobs, and eventually bring improved economic stability to the country. Improvements in productivity levels will help attract more dollar inflows.

According to the summaries provided by the Pakistan Bureau of Statistics, exports from Pakistan in FY2023 decreased to $27.7 billion from $31.8 billion in FY2022. The exports in FY2022 were the highest ever reported in its history as they increased more than 25 per cent year-on-year in FY 2022. Even though the level reported in FY2023 was the second highest, it is disconcerting that the exports decreased, particularly when the economy is experiencing severe challenges on the external front and the value of the rupee continuously slides due to its depreciation. The administrative measures to reduce the trade deficit and consequently shrink the current account deficit have put a toll on the economy and exports. With manufacturing activities primarily dependent upon imports of capital goods and unfinished goods, the measures to reduce imports have hurt the capacities of the exporters. This is critical given that Pakistan needs crucial inflows of foreign exchange.

According to the International Trade Centre’s, the efforts to recover international trading activities after the COVID-19 pandemic-induced slump have propelled exports beyond the values reported pre-COVID-19. Global exports in 2022 were reported at $24.5 trillion, higher than values reported previously. China added more than $1 trillion in exports, increasing from $2.6 trillion in 2020 to $3.6 trillion in 2022. The United States of America, too, surpassed $2 trillion, increasing from $1.4 trillion in 2020. The world average for exports of goods and services as a percentage of GDP was 30.6 in 2022, the highest value reported since 2008. This had fallen to 26.4 per cent in 2020 due to the nightmarish situation in shipping and logistics during the COVID-19 pandemic. The world is likely becoming more integrated as international trading activities have recovered and propelled past the levels reported even during pre-COVID-19 eras. Therefore, it becomes increasingly important for Pakistan to increase its level of integration into the regional and global markets and focus on improving the capabilities as well as the capacity of the exporters.

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