Exchange rate depreciation and export price competitiveness: the case of Pakistani manufacturing industries

Export price competitiveness assessment is a vital component in evaluating a country's macroeconomic performance and sustainability of its policies. It is generally argued that exchange rate depreciation stimulates exports and curtails imports, while exchange rate appreciation harms exports and stimulates imports. At times favourable factors (such as currency depreciation), however, may not result into increased exports because exchange rate movements affect exports not only by means of its depreciation but also through its variability (risk). In this paper, the above prediction has been assessed by considering the co-existence of import content in production of exportables and dynamic productivity gains. Results show that in the manufacturing sector of Pakistan, the exchange rate volatility partially offset the positive effect of depreciation on exports, that is, volatility in exchange rate has resulted into a decrease in export price competitiveness despite currency depreciation and, hence, the country experienced a slow growth in manufactured exports.