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Rupee depreciation: quick action needed

Rupee depreciation: quick action needed

By Zia Qureshi, Weekly Pulse, August 26, 2013

The economy of any state is judged by the strength and stability of the country, the weakness and instability of currency has direct impact on the success and development of any state. Pakistan is one of those countries which are facing this threatening problem in which the national currency is continuously losing its worth and value on the international market. There are so many reasons which have laid the foundations of this problem in Pakistan.

Pakistan is already shattered by the war against terror, energy crisis, hyperinflation, political instability and the horrible floods and earthquakes which have displaced and left 20 million people helpless. Until or unless the production of the country does not rise, the economy of the state could not be stabilized, but unfortunately due to various natural disasters vast areas of cultivated land has been destroyed, and Pakistan being an agro based country has to suffer due to this loss and damage.

One of the crucial reasons for the devaluation of money in Pakistan is because of high inflation. Due to immense inflation the State Bank of Pakistan has felt the urgency of issuing more currency and notes in the local public and commercial sectors to meet up the high inflation, but the national bank of any state can’t issue notes and currency unless they have an equal amount of reserves of precious metals which include gold and silver. Pakistan does not have such high reserves of precious metals so they can’t issue worthy and high value currency. Due to this reason, the only possible solution for this query is that they have reduced the worth of the currency and can dispatch high quantity notes and currency which international value is not that much high.

Such high values of loans and debt has also played its role in the devaluation of the national currency. The international currency is getting stronger and stronger and the hub is the dollar which has reached its record value in the last decade or so. The negative balance of payment has also contributed to the devaluation of Pakistani rupee and with the same time immense and high unemployment has made the scenario worse for Pakistan. To improve the value of the currency the economy of the state should improve and the financial budgeting should be made in positive balance of payments.

Pakistan currently produces cotton, rice, fish, fruit, vegetables, pulses and much more. These are the goods that add value to the rupee. The rupee is worth more as these goods produced in Pakistan increases. Instead of selling these goods in Pakistani rupees, which would create a ‘demand’ for the rupee on the international exchange market, the State Bank of Pakistan settles the export payments in US dollars, called the balance of payment (BoP). Any country that imports from Pakistan would have to otherwise buy rupees from the international forex market to pay for Pakistani products. This may not sound too trivial but it takes the ‘value’ from the rupee away and transfers it to the US dollar (think petro-dollar). The rupee becomes like gold on the Treasure Island – not much left to be bought with. A pretty sad thought that the very country that grows the best rice, doesn’t get to feed its own citizen that grow it.

Currently, the State Bank of Pakistan uses the dollar and euro to settle its BoP account. One should realise that the value of the dollar and euro is not static. Due to the financial crises and socialisation of financial losses in the banking sector, American and European central banks have been running their printing presses on turbo mode. The more the central banks print or issue electronic credit to the markets, the more these currencies lose their value. By using foreign currency, not only does Pakistan’s economy import American inflation, but it also results in the devaluation of the rupee.

Karachi Chamber of Commerce and Industry (KCCI) expressed concern over recurring devaluation of the Pak rupee against the dollar, terming it detrimental for the economy. President KCCI Haroon Agar said the enhancement in the rupee-dollar parity was due to inefficiency of policy makers. The rupee has plunged to lifetime low position and would not attract the investors. Due to huge difference in the interbank exchange rates the expatriate Pakistanis would opt to other channels to send their remittances to Pakistan.

The country cannot afford to have one of the worst performing currencies in Asia which is result of deficits and lack of capital inflows, depletion of reserves, flight of capital and failure to push through economic reforms. It appears policymakers lack a consistent plan to stabilise the currency, which will compel business community to start looking at opportunities in other countries.

He said almost over 50 percent depreciation of Pakistan rupee against US dollar since last five years and has nearly halted economic growth in the country, hitting all the important areas of economy from agriculture to industry, manufacturing to import of goods and government should take immediate measures to seize further devaluation of rupee to avoid more damaging consequences for the economy.

Rupee devaluation is multiplying the cost of doing business and badly affecting the industrial, manufacturing and agriculture sectors as Pakistan has to import commodities, machinery and industrial raw material. He said though the weaker rupee may benefit to exporters by giving them more rupees per dollar, but this benefit is neutralised by the costly imported inputs of manufacturing sector including textiles thus eroding the financial advantage of a weaker rupee.

Our economy is in slump as all sectors of economy are showing negative growth and further fall in value of rupee will cause more contraction in economic activity leading to reduced tax revenue for government and huge foreign debt. He said in the current scenario, depreciation of the rupee at its current pace would not push up exports, rather would certainly inflate import bill and inflation that, over the years, became closely linked to the exchange rate because of Pakistan’s ever higher reliance on imports, particularly of energy inputs.

The faster the depreciation of rupee, the higher will be inflation and lower the competitiveness of Pakistan’s business and industry. Therefore the government should get quickly into action to control this damaging trend to bring stabilisation in exchange rate to protect national economy from further damage.

About Taimoor

Taimoor
Taimoor is the Digital Content Lead at www.RightJobs.pk . He has been working at prominent media outlets for several years. He blogs at several websites about current affairs, religion, careers and other walks of life.

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