The Impact of Artificial Exchange Rate on Pakistan’s Exports and Investments
Pakistan’s economy has been facing significant challenges in recent months due to a managed exchange rate policy that has resulted in an artificial appreciation of the local currency against the US dollar. This policy, which was implemented for over 18 months, has had far-reaching consequences for exporters and foreign investors.
The rupee has continued to appreciate against the greenback at a steady pace, with some regional currencies such as those of India and Bangladesh also depreciating in value. Despite this, Pakistan’s trade deficit increased by Rs4 billion during the last 18 months, offsetting substantial remittance inflows of $41.5 billion. This trend has led to concerns that the rupee is being kept at an artificial level.
Exporters have been expressing their dismay over the policy, citing several reasons why it hurts exports and investments. One major concern is that exporters are losing markets due to high production costs, which are 12% higher than in China. As a result, they cannot compete in the international market and are unable to increase exports despite efforts to reduce prices.
Another issue is that the artificial exchange rate has led to an imbalance between imports and exports. The total import bill surged by Rs4 billion during the last 18 months, while exports failed to grow due to the weaker dollar. This has resulted in a trade deficit of $39 billion for FY26.
The government and State Bank of Pakistan believe that a stronger rupee brought stability to the economy, but exporters found it detrimental to economic growth. They argue that instead of opting for artificial currency appreciation, there should be gradual depreciation to make Pakistani goods competitive with international markets.
Experts have noted that the Real Effective Exchange Rate (REER), which is used as an indicator of exchange rate policy, has risen significantly since 2016. This suggests that the rupee is being kept at an artificially high level. Furthermore, foreign investors are showing low interest in investing in Pakistan due to concerns over the government’s ability to stimulate growth.
Exporters have been provided with incentives such as subsidized loans and other financial assistance, but they have found them of limited help. The manufacturing sector has also been underperforming for three consecutive years, which further exacerbates the situation.
The government plans to increase exports to $60 billion in the next five years, while Deputy Prime Minister Ishaq Dar is willing to double trade with the US to $20 billion in the same timeframe. However, exporters are surprised by these plans and have expressed skepticism about what Pakistan will export.
In conclusion, the artificial exchange rate policy has had a devastating impact on Pakistan’s exports and investments. The government must reconsider its approach and adopt more market-oriented policies to stimulate growth and increase competitiveness of Pakistani goods. Only then can we expect to see an improvement in our economic situation.
Based on reporting from Dawn.
