THERE is an enduring consensus in Pakistan that the exchange rate should not be allowed to move by much as a matter of routine, and that determining its level is a matter of discretion for the state.

In some areas we call this “Dar-o-nomics”, after Ishaq Dar, whose name came to be attached to exchange rate policy not because he invented it, but because he has been its most important and visible advocate. Otherwise this thinking dates back to Ghulam Ishaq Khan, who was of the mind that the state should liberalise the economy in such a way that it does not lose its commanding position as the arbiter of all economic outcomes. From deciding the exchange rate, to deciding who gets to make how much profit and what should be the normal indexed rate of return on private capital in the economy, GIK wanted a model of liberalisation that kept all these decisions firmly in the hands of the government.

Nowhere is this thinking more clearly stated, and perhaps to more devastating effect, than around how it treats the question of the exchange rate. Over the years many have given voice to this thinking in different ways, and their arguments cluster around three basic assertions. One, devaluations lead to a hike in the rupee-denominated debt service burden. Two, devaluations do nothing to boost exports, they only provide a short-lived impetus that is quickly frittered away as costs of imported inputs rise accordingly, and exporters are forced to pass the price benefit on to their buyers.........

© Dawn