Key Takeaways
- Devaluations in Pakistan are driven by FX liquidity supply and demand, not export competitiveness.
- Three key episodes of devaluation from 2007 to 2023 illustrate this point.
- Critics argue devaluations lead to higher debt burden, inflation, and reduced export competitiveness.
There is a long-standing belief in Pakistan that the exchange rate should not fluctuate frequently, and that its determination is a matter of state discretion. This view, often referred to as 'Dar-o-nomics', has been championed by figures like Ishaq Dar and Ghulam Ishaq Khan.
Critics of this policy argue that devaluations increase the burden of rupee-denominated debt, do not significantly boost exports, and often lead to inflation, particularly affecting the poor. However, these arguments are based on a misunderstanding of the underlying economic dynamics.
According to the article, devaluations in Pakistan are not aimed at boosting export competitiveness but rather reflect the changing supply and demand of foreign exchange (FX) liquidity in the economy. The author suggests that devaluations are necessary to prevent a mass stampede for foreign currency, which can occur when the supply of dollars relative to rupees dwindles.
The author highlights three significant episodes of devaluation in Pakistan’s recent history: from 2007 to late 2008, late 2017 to 2019, and the middle of 2021 to the middle of 2023. Each of these episodes occurred when Pakistan’s foreign exchange reserves were under pressure, leading to a devaluation to stabilize the situation.
Despite the arguments against devaluations, the author asserts that these episodes demonstrate that devaluations are not about restoring export competitiveness but about managing the FX liquidity in the economy. The focus is on ensuring the stability of the exchange rate to prevent a crisis.
The article concludes by urging those who advocate for a fixed exchange rate to study these historical episodes. The author emphasizes that devaluations are a necessary response to economic realities, not a policy aimed at long-term economic growth or export competitiveness.
In summary, the author argues that the focus should be on understanding the economic factors driving devaluations rather than opposing them outright. The key is to manage the exchange rate in a way that prevents a crisis, rather than trying to maintain a fixed rate that may not reflect the current economic conditions.
