‘Managed’ exchange rate undermines exports and investment, experts warn

Pakistan's exporters have criticised the country's managed exchange rate policy, arguing that an artificially strong rupee is undermining export competitiveness, discouraging foreign investment and widening the trade deficit.

 

Exporters noted that the rupee has appreciated by around PKR 4 against the US dollar over the past 18 months, while most regional currencies, including those of India and Bangladesh, have depreciated. They argued that the stronger rupee has made imports cheaper, contributing to a record USD 39 billion trade deficit in FY2025-26 despite record workers' remittances of USD 41.5 billion.

 

Javed Bilwani, exporter and former president of the Karachi Chamber of Commerce and Industry (KCCI), said Pakistani manufacturers face production costs around 12% higher than China, making it difficult to compete in global markets. He argued that a gradual depreciation of the rupee, rather than its continued appreciation, would improve export competitiveness and encourage reinvestment.

 

Exporters also pointed to a surge in imports, including higher vehicle imports, as evidence that a stronger rupee has fuelled import demand while failing to boost exports.

 

Some analysts highlighted that Pakistan's Real Effective Exchange Rate (REER) has risen to 106.4, above the benchmark level of 100, suggesting the rupee is overvalued. They warned that an overvalued currency discourages foreign direct investment, particularly in export-oriented industries.

 

Exporter Amir Aziz said the exchange rate policy, combined with relatively high interest rates, is increasing production costs and forcing some exporters to scale back operations. He also raised concerns over smuggling and under-invoicing, which he said have further weakened the competitiveness of domestic manufacturers.

 

While the government has introduced incentives, including subsidised financing for exporters, industry representatives argued that these measures have had limited impact as manufacturing growth remains weak. They questioned how Pakistan plans to achieve its export targets, including raising exports to USD 60 billion and doubling trade with the United States to USD 20 billion over the next five years without stronger industrial growth.