A simple study comparing the exports of Pakistan and Bangladesh has busted a myth that a depreciating currency increases exports for a developing nation.
“At least it didn’t happen in Pakistan and Bangladesh’s case,” said CEO Topline Securities, a brokerage house. “Bangladesh’s currency, the taka, has remained stable while the Pakistan rupee depreciated. But Bangladesh’s exports nearly doubled while Pakistan’s exports stood where they were ten years ago.”
According to economic books, when the currency of a country depreciates against an international currency, which is the US dollar, it makes input costs such as labor and raw material cheaper for the country in comparison to the dollar.
For instance, when the dollar rate is Rs150 and the labor cost or per day wage is Rs1500, it would cost $15. But if the dollar rate increases to Rs160, it will make labor cheaper by 7% as it will take $9.30 to pay for the same work.
This means that if an exporter was incurring a cost of Rs10,000 in making a certain product, let’s say a leather jacket, she would be incurring a cost of Rs9,300 after the currency depreciates. It means, the exporter can now sell her goods at a lower price than before, apparently making Pakistani exports cheaper and therefore more competitive in the international market. The exporter is expected to export higher quantity than before.
“Pakistan exports remained $25 billion in ten years in spite of the Pakistan currency falling against the dollar. Meanwhile, Bangladesh’s exports increased from $23 billion to $39 billion with the Takka remaining stable,” Sohail said.
“This certainly shows that a depreciating currency doesn’t always help increase exports. There’s some other factors definitely,” he added.
However, another economist, Muzammil Aslam, pointed out that the causal relationship between currency and exports was actually the other way round.
“The outcome of lower exports is a weak currency and stronger exports is a stable currency,” tweeted Aslam in response to the Topline tweet.
It means a stable currency doesn’t increase exports but the relationship is the other way round. When exports increase, it stabilizes the local currency and not the other way round.
Meanwhile, when exports dwindle or remain stagnant and imports increase, the local currency, such as the Pakistani rupee, becomes weak.
During the last ten years, Bangladesh exports have increased from $23 billion to $39 billion. Pakistan’s exports have remained stagnant at $25 billion. In fact, Pakistan’s exports fell in between below $25 billion for some years.
In financial year 2011, Pakistan exports were $25.4 billion while Bangladesh exports were $23 billion – around 11% less. Now Bangladesh’s exports are 34% higher than Pakistan’s at $39 billion against Pakistan’s $25.63 billion.
During the last ten years, the Pakistan rupee has depreciated against the US dollar from Rs87 to Rs164. Bangladesh’s taka has remained comparatively stable. Ten years ago, a dollar would cost 75 taka and presently it costs 85 taka.