FEW economic issues provoke as much debate in Pakistan as the effect of the exchange rate on exports and the effectiveness of monetary policy when inflation is driven by supply-side factors. For now, we’ll focus on the nexus between the exchange rate and exports. While export-led growth remains a popular theme in policy discussions, an anti-export bias persists in practice. Unsurprisingly, despite decades of repeated policy failures, our approach to managing balance-of-payments remains unchanged. Policymakers have yet to accept that a market-based exchange rate and foreign exchange liberalisation are essential ingredients of a successful export strategy.

Two arguments are usually made to downplay the role of the exchange rate. The first is that the rupee has lost considerable value over the past several years, yet exports have remained stagnant. The second is that Pakistan’s export industries rely heavily on imported raw materials, meaning that currency depreciation increases input costs and thus dilutes any competitive gains.

Export growth critically depends on competitiveness, ie, the ability to produce and sell goods and services in international markets at prices and quality that outperform competitors. The........

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