The case:

Among many macroeconomic problems of Pakistan, trade deficit is one of the major problems. The policy of devaluation of Pakistani rupee is usually adopted to reduce this trade deficit. Our currency depreciated from Rs. 24.84 per dollar to Rs. 85.59 per dollar between year 1991-92 and 2010-11, and it is now Rs. 90.1562. This depreciation of rupee was usually done to promote the exports and to reduce the imports. But this strategy is not so much successful and Pakistan’s trade deficit still exists at very high level. Out of our major export items like cotton, rice, wheat, vegetables, fruits, fish, leather, surgical instruments, woolen carpets, jewellery, pharmaceuticals, cement, petroleum products etc, only cotton and cotton manufactures have remained at the top of the export list and fetched the highest dollar earnings during the last fiscal year 2010-11 and our export earnings reached to $25 billion. If we see the import side, our country heavily depends on the imports to meet its requirements of machinery, raw materials and oil. We depend on imports even for essential food items like soyabean, palm oil, baby food and pulses etc. Despite of agricultural country, we are still importers of food. Our import bill increased from $28 billion to $32 billion in the last fiscal year 2010-11due to the high food and oil prices. On the basis of this trend of imports and exports, our current account deficit for year 2012 has been estimated at 2.5% of the GDP.

Requirement:

Keep the above scenario into consideration; discuss why the policy of devaluation is not so much successful to improve the trade deficit conditions of Pakistan? In your opinion, what can be the possible ways to promote exports and discourage imports in order to have favorable terms of trade?
Important Instructions:

1. Your discussion must be based on logical facts.
2. Your comments on the topic should not exceed 100 words.
3. The GDB will remain open for 2 working days/ 48 hours.
4. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
5. Obnoxious or ignoble answer should be strictly avoided.
6. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

SOLUTION:
Keep the above scenario into consideration; discuss why the policy of devaluation is not so much successful to improve the trade deficit conditions of Pakistan? In your opinion, what can be the possible ways to promote exports and discourage imports in order to have favorable terms of trade



The volume of exportable goods like cotton and rice also depend upon climate in the country, which determine good or bad harvest. It is agonizing to accept that even after good harvest due to favourable climate Pakistani goods can fetch better prices only if the harvest in competing nations has been bad due to unfavourable climate

Very recently Pakistan has been paying acute attention in the sector of Information Technology. Every endeavour is being made to enrich the younger generation of the country towards this sector so as to boost software exports and promote email commerce.

The import bill of the country despite best efforts could not be brought down. Import of petroleum and petroleum products is very vital for the survival of the economy. A substantial portion of our foreign exchange is also utilized for the import of tea. Moreover the prices of petroleum and its products prevailing in the international market have direct impact on Pakistan’s trade balance and its balance of payment. Increase in prices of petroleum and petroleum products also results in corresponding increase in numerous items attached with it changing overall price structure in the country.

Pakistan has time and again devalued its currency anticipating that it will boost its exports and will make the exportable goods of the country more competitive in the world market. But these wishes have failed to materialize so far. Our goods failed to compete with our neighbouring countries despite the fact that their currencies were stronger than ours. It is strange to see that despite using the same factors of production and also devaluing our currency, our goods fail to compete with other goods. This is so because our domestic input cost of production is quite higher than our neighbouring countries.

It may create inflation in the country. Our long experience has shown us that devaluation is not the proper remedy for economic growth of the country. It has resulted in increasing our debt burden to the extent that nowadays it is not possible to obtain easily any aid from world lending agencies. It may be realized that for whatever reason we devalue our currency it results in manifestation of weakness of our economy to the other countries. Further, excessive devaluation of the past has adversely affected our credit rating. Moreover foreign investors are now more conscious or reluctant for making any investment in the country. Only logical path available to us is to try to reduce the cost of production of our exportable goods and increase the productivity of the goods, which will enable us to compete in the world market. Participation of everyone concerned towards the above goal will make a difference, but we should do it now not later.