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Worth of Pakistani Rupee in The Asian Market 2021

Worth of Pakistani Rupee in the Asian market 2021. Why It is lowest now in Imran’s era?

Pak Rupee

The Fiscal and Monetary Policy are the two tools used by governments to collect money from its tax payers and for the circulation of money in the economy enabling local and foreign investors to act accordingly based on the government’s economic policies to drive economic growth in the country.

The objective of the government is to create economic policies which create economic wealth, bring in economic prosperity for its people, increase people’s standard of living, maximize per capita income and can control over inflation in a specific time period.

The fiscal policy implies tax collection, its spending, monetary policy implies controlling banking interest rates and money supply in any economy to create an inclusive business environment for investors to take money out of the bank and invest in projects as investment is the engine of economic growth.

The term coined as “investment is the engine of economic growth” needs to be understood with keeping in mind that GDP growth is how the economic activities are understood over the period with investment coming from the public sector, government investments, foreign investments and policy driven by fiscal and monetary tools.

The external debt to GDP ratio is the right measure to evaluate how good the economic policy was able to bring in economic prosperity for its people over a certain period of time not less than 8-10 years as we are among the underdeveloped countries of the world and we have a poor economy, lower GDP growth rate and high accumulated external debt.

Pakistan’s total debt to GDP has come down to 83.50% of GDP as of 30th June 2021 from 87.6% on 30th June 2020. Both domestic and external debts have a downward trend from last year.

The domestic debt decreased 55.1% from the GDP that was 56% last year. The external debt to GDP recorded at 28.5% of GDP was 31.6% last year.

During the past two years it is becoming more difficult to bear the enlarging size of debt servicing which eats up one third of the ann­ual budget of the country and the government’s domestic and external debts stands at $226.9b at the end of FY21 compared to $186.3b in FY19 and in FY20 it was $205.8b.

Now to understand economy at a larger context let’s keep in mind the economic policy made in case of Pakistan will show its results at least in 8-10 years and each passing by government barely completes 5 years to hand it over to another and before leaving puts blame of all its wrong policies given on the party that was in power before coming to the public office. It’s a shortcoming and this makes the situation worse for every next government as it needs to settle the score of the outgoing government and then score within 5 years which is just not practical but democracy fails us with this limitation and no accountability for outgoing government on the poor performance as it will endanger political process and democracy will not prevail any further.

pak rupee deficit

Now let’s analyze the data given to us by the State Bank. It shows $27b were added by the Pakistan (PTI) after coming into power since 2018 when they got into public office foreign debt was $95b the total current foreign debt stands at $122b. Muslim League-Nawaz external debt rose from $34b to $61b from 2013-17.  Pakistan’s Peoples’ Party from $15b to $46b by the end of 2008 after Musharraf was out of his office. The chart (A) below is how you can analyze each period spread from 2000 till 2021 to see where economic prosperity was achieved as it’s the data that speaks for itself.

 

The PKR, which has seen its value depreciate by nearly 11% against the USD since its recent high in May and it’s hitting a new low of 170.8 see chart (B) at the inter-bank on Monday 4th Oct 2021. To understand the dollar rate and its variation with respect to the Pakistani rupee we must understand both currencies have different demand as all currencies are purchased and sold in exchange to buy goods. It’s a simple question of demand and supply just like commodities.

The currency in specific the US Dollar is high in demand because the crude oil is traded in dollar and as the oil trade accelerates after the post covid-19 breakout in the last quarter we see a rise in dollar compared to PKR or in other words the oil consumption increasing so does the dollar price and demand to other exchangeable currencies.

If we need more dollars to import stuff including crude oil for our domestic needs and we have lesser exports to bring in dollars we can say our currency is in lesser demand or weaker in comparison to other foreign currency or dollar. The result is that if the dollar rate increases it will be higher than our currency due to less exports in comparison to imports. We have $7.1b of trade deficit in FY20-FY21. This is why countries have to establish a certain foreign currency reserve to manage or mitigate such situations so they do not have to purchase it from the market at what we call balance of payment. It is done to stop PKR further depreciating against the US Dollar.

The second reason the government is saying is that an outflow of $300m is taking place on a daily basis through imports and an inflow of $200m in exports and remittances leading to a deficit of $100m it can only be stopped if certain import items are banned.

Secondly if we need more dollars not for import purposes but to repay debt instalment for long term accumulated external debt, we can again say we need more US dollars hence creating an additional demand for dollars against PKR rupee.

Let’s now see how economic growth activities are going in 2020-2021 in order to see why the dollar prices are rising with context of dollar demand and rupee demand in comparison looking at a broader picture.

As the global demand of crude oil is increasing due to post pandemic aftermath rising at 5.3 mb/d at average to reach 96.2 mb/d in 2021 it will increase at the rate of 3.2 mb/d in 2022.This rising trend in oil demand creates demand for dollar and they both are correlated and therefore a certain increase in demand will have impact on the dollar and vice versa.

We have to keep foreign currency reserves to control dollar rate but once we have to match increasing rates of oil import and we have to pay the debt instalment we find ourselves again in need of dollar as to control fluctuation in currency and in the end as our debt keeps on accumulating the dollar rate goes higher cannot be managed by just making balancing act as the foreign currency should be coming into our economy through other means like exports and foreign investments and foreign remittance to have enough foreign exchange dollars that we can buy at lower rate if it’s in abondance.

The budget deficit with increasing pressure of external debt leads to inflation as indirect taxes are added to the wherever possible to provide sufficient funds needed for balance of payment and foreign reserves to mitigate budget deficit and therefore the government will start apply indirect taxes to finance its immediate needs and it also put burden on GDP growth rate which is also a downside for the government but this balancing act continues until the foreign exchange reserves reach optimum that government intends.

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Category: Business

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