Aspects of the Problem of Foreign Exchange Pricing in Pakistan

Abstract

Pricing of foreign exchange in Pakistan is a subject which has at once been one of the most widely discussed of economic issues in the country and the issue (or set of issues) which seems most in need of synthesis. This is because Pakistan, in the pattern of most underdeveloped countries (and developed countries, for that matter), has allowed the problem to be fragmented into subproblems. The objective of the present paper is to bring these subproblems into an integrated discussion, so that their interrelationships can be more clearly seen. The professional literature on this subject has expanded greatly in recent years, very largely as a result of the efforts of the staff of the Pakistan Institute of Development Economics. These studies have focused on the following aspects of the general problem: (1) the degree of overvaluation, (2) the nature and effects of various compensatory policies designed to deal with the disequilibrium (import controls, tariff protection, the export bonus scheme), and (3) the prospective effects of general devaluation. As the notes at the end of this article indicate, the bulk of the work done has been in the area of discussion of specific policies attendant to the disequilibrium. The basic problem is overvaluation of the Pakistan rupee. This means that exporters of a large proportion of the total value of goods exported receive only Rs. 4.76 for each US$1.00 worth of goods sold on the world market, while those who import are willing to pay a great deal more than that to gain access to foreign exchange. Accordingly, exporters sell less on world markets than they would at the free market rate. For those few goods of which Pakistan produces a large proportion of the world supply, this means higher prices than would otherwise obtain, and therefore loss of earnings if the elasticity of Pakistan's share of world demand is greater than unity. In the cases of goods of which Pakistan's share of the world market is small, the reduced sales mean loss of earnings unambiguously. Except possibly for raw jute, in other words, the restriction of exports