Debating on the value of the dollar is a favorite pastime of our nation. Its value is often considered an indicator of the economy and the government’s performance. If panic buying of the dollar is controlled, then the rupee will easily appreciate by Rs25-50.
Table of Contents
Pakistan’s Currency Challenges
In the past, the Pakistani rupee was strong as compared to the US currency, showing economic stability. But nowadays, our currency has weakened significantly, reaching Rs340 against the dollar just two weeks ago. This sharp decline has worried many people in the country.
Experts are now trying to predict when our currency might get stronger again after the government’s recent efforts to stabilize the economy. This situation highlights the challenges our country is facing, and people are eagerly waiting for things to get better, hoping for a return to the stable times we once had.
Since the US currency is not Pakistan’s mainstream currency, its fluctuations are based on supply and demand, much like other commodities in the market.
Dynamics of Pakistan’s Dollar Exchange
Dollar’s supply in the country has five possible sources:
- Remittances from overseas Pakistanis
- Foreign Investment in Pakistan
- Foreign Aid
- Foreign Loans
On the other hand, the demand for dollars has four sources:
- Repayment of Foreign Loans and Interest
- Repayment of Foreign Loans and Interest
- Payments by Pakistanis
Generally, the dollar’s value is determined at the intersection of this demand and supply. From 2013 to 2017, the dollar’s value remained fixed at Rs105 because these market forces were balanced at the same rate.
Economic Challenges Unraveled
People who didn’t agree with the policies during that period might say that the stable value of the dollar was because there were enough foreign loans available, but not many people wanted to borrow money, so the demand for the US currency remained low.
After 2017, the dollar’s value started rising abruptly, touching Rs180, which later stabilized at Rs160 during the Covid era.
Following the change in the Afghan government in August 2021 and the Ukraine war in February 2022, the dollar’s trajectory brought it to Rs300, even after many governmental interventions, and its future outlook remains concerning.
Unraveling Causes and Consequences
The question is, what happened after 2017, because of which dollar’s ascent could not be arrested? Around this time in India, the dollar went from INR 65 to 82, an increase of about 26%. In Bangladesh, it went from BT 77 to 106, about a 28% increase.
However, in Pakistan, this depreciation exceeds 185%, which is certainly very alarming for individuals.
Simply put, a country’s exchange rate decline should be equal to the annual difference in inflation rates between that country and its trading partners.
Challenges and Solutions
From the fluctuations in prices, it is estimated that $5 to $10 billion have been stored both inside and outside Pakistan. Over the past three years, in addition to Hawala/ Hundi transactions, the under-invoicing of imports and over-invoicing of exports have been resorted to excessively, evident in the form of solar import over-invoicing.
This added demand has pushed the US currency, which should be at 245, to reach 300. It’s essential to remember that such a situation can be temporarily controlled, but until we bring the informal forex market entirely into the documented loop, force people to withdraw dollars through market mechanisms, and block undue currency transfer routes, achieving a rate of Rs250 per dollar will remain elusive.
Challenges, Solutions, and Hope
It is essential that appropriate and continuous documentation and regulation of the movement of foreign exchange are done, the increase in the money supply should be kept at a suitable multiple of the increase in national income, and productive capacity should be enhanced so that exports can also increase, and there is self-reliance on local goods.
The task is undoubtedly challenging, but many countries, including Vietnam, have demonstrated achieving all this in just a couple of decades. The situation isn’t as dire as it was in Zimbabwe in 2010 or in Venezuela currently, where the dollar reached billions and trillions against the local currency.
If somehow panic buying by people is controlled, then the currency will easily appreciate by Rs25 to Rs50. The rest requires hard work, efficiency, and progress. The ailment is not incurable.