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ISLAMABAD: Export responses to real exchange rate (RER) depreciations in Pakistan are lower than those to appreciations, limiting the role that competitive RERs have had in boosting export growth elsewhere, says the World Bank (WB).

The WB in its latest policy research paper, "Slow Rockets and Fast Feathers or the Link between Exchange Rates and Exports, A Case Study for Pakistan," stated that exports do not respond symmetrically to appreciations and depreciations of the RER in Pakistan, and that the extent of the asymmetry is substantial, limiting the role that competitive RERs have had in boosting export growth elsewhere. The paper finds that (i) exports of differentiated products grow more slowly when the RER depreciates than they fall when it appreciates; (ii) exports from sectors with relatively greater supply constraints-in particular related to accessing finance - respond less to depreciations than to appreciations; and (iii) dollar prices for Pakistani exports tend to fall after nominal depreciations of the Pakistani rupee, in violation of the Dominant Currency Paradigm and consistent with pricing-to-market behavior, further accounting for the low response of exports to RER depreciations.

It further stated that this asymmetric pattern to be robust to the periodicity of the data, as well as to the level of disaggregation - asymmetric export responses are also found when using product-destination-level data for exports, and BRERs.

The asymmetric export response to appreciations and depreciations only vanishes when exchange rate changes are very large - in the top five percent of the exchange rate change distribution, suggesting that it is very large depreciations that allow exporters to overcome information costs, supply constraints, or pricing-to-market (PTM) behavior from global buyers, it added.

"We exploit sectoral variation in the extent of product differentiation - proxying the variation in costs associated with gathering information on the buyers when ramping up exports; and variation in access to finance, financial dependence, and factor intensity - proxying variation in supply constraints," the report states.

It further states that differentiated products - more intensive in information at the time of increasing shipments or building new export relationships than homogeneous products - show a distinct export response to appreciations and depreciations, being more responsive to the former than to the latter, while exports of homogenous products react symmetrically to upward and downward changes in the RER.

Well-established conventional wisdom - a part of the failure of exports to grow after RER depreciations lies in the inability of sectors to create "exportable surplus" - or, in other words, to increase supply when conditions improve, it added.

The paper states that exports from sectors with higher access to finance schemes, lower finance dependence, and higher labor intensity react more to depreciations as they face lower supply constraints.

They can obtain financing to incorporate additional equipment or to get the needed workers that are abundant in the market.

Back-of-the-envelope calculations based on results suggest that if exports of differentiated products responded to depreciations as they do to appreciations and if all sectors had a similar access to finance as electrical machinery does, after the real depreciation experienced between December 2017 and June 2019, exports would have grown by an additional 1.5 percentage points.

Dollar prices systematically fall for Pakistani exporters relative to others, when the rupee depreciates, which could be consistent with global buyers with market power stabilising purchase prices in rupees rather than in dollars, akin to pricing to (source) market.

Markup adjustments tend to stabilise Pakistani export prices in rupees, to a larger extent during depreciations.

This is further accentuated for larger NER changes.

Back-of-the-envelope calculations suggest that in the absence of pricing to sourcing market in Pakistan, Pakistani exports would have grown by an additional $150 million, which accounts for an additional 0.6 percentage points.

The results provide disaggregated underpinnings for the weaker export response to RER depreciations relative to that to appreciations, and help quantify the importance of each of the three channels - information, supply constraints, and pricing to market.

It further stated the sluggish reaction to depreciations stems from these three different channels.

Public policy should consider how sector, firms, and products' characteristics determine differential responses to improvements in price competitiveness.

Complementary policies addressing those particularities, active export promotion to reduce information costs for differentiated goods, and support to export finance could help achieve more sustained increases in exports, it added.

Copyright Business Recorder, 2020


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