Rupee Devaluation Cannot Fix Economy: FBR Chairman

In a recent commentary, the Federal Board of Revenue (FBR) Chairman provided an example of yogurt to illustrate why simply weakening the Pakistani rupee (PKR) may not be sufficient to resolve the country's trade deficit. The chairperson explained that a weaker currency alone cannot create stronger exports for Pakistan, as the economy first needs to possess the necessary productive capacity.

The FBR chairman compared the economy to a lake, where someone attempts to produce yogurt by adding a spoonful of yogurt into water. He argued that supporters of rupee devaluation believe a weaker currency will automatically make exports cheaper, decrease imports, and ultimately eliminate the trade deficit. However, this approach only works when the economy possesses the right conditions to capitalize on a weaker currency.

The chairman pointed out that a robust export economy must produce a significant portion of the goods sold abroad using domestic raw materials, energy, and skills. He used Pakistan's textile sector as an example, highlighting that a large share of its inputs, such as cotton, dyes, machinery components, and fuel, are imported. Consequently, a weaker rupee increases the cost of these essential inputs, reducing the intended benefits.

The FBR chairman further emphasized that Pakistan cannot easily reduce major imports due to heavy reliance on imported oil, gas, food items, and medicines. Additionally, a substantial portion of exports is concentrated in textiles. He also cautioned that the advantages of a weaker currency may quickly diminish as domestic prices rise, potentially offsetting the initial price advantage given to exporters.

Remittances, a major source of foreign exchange, can increase in value due to a weaker rupee, but much of that money is spent on imported consumer goods. The chairperson provided examples from Britain, South Korea, Egypt, and Pakistan to demonstrate how currency depreciation yielded different outcomes depending on the structure of each economy.

He concluded by stating that Pakistan needs to develop an economy that produces more of what it exports, decrease the imported component in production, lower barriers protecting the domestic market, and direct remittances toward productive investments. The chairperson emphasized that simply adding yogurt to a lake of water, or attempting to fix the trade deficit through rupee devaluation, will not yield the desired results.