The Devaluation Saga - Rupee vs Dollar

Manzar Abbas

Devaluation Personobjective to assure the buyers worldwide that goods are manufactured in accordance with the internationally accepted standards of quality). The quality goods produced accordingly and at competitive prices will eventually provide the country an ample opportunity to expand its export market in various parts of the world and expand its economic base . This expansion and increased share will earn the country both valuable foreign exchange on one hand and on the other hand it gives momentum to the production and economic wheel by providing work opportunities and growth of other small industries. The increase in employment rate and growth in the work opportunities enables the people power to purchase and consume, which in turn blosters the pace of the economy. The foreign exchange earned by a country is used to meet the following objectives.
To improve the balance of payments by paying for the goods and services which are not available with in the Country.

  • * To pay off the debts of the country.
  • * To provide the central bank of the country with the foreign exchange reserves necessary to back-up the local currency. In the banking system the local currency minted by the central bank requires reserves of precious metals, like gold, silver etc and foreign exchange reserves to back up the local currency.
  • The continuous devaluation of Pak Rupee against US $ has very badly affected our economic scenario. Our country is already shattered with the war against terror, energy crisis, hyperinflation, political instability and the flood last year which displaced approximately 20 Million people. A vast area of cultivated land was ruined by the catastrophe and the infrastructure of the affected and adjoining areas demolished. The constant devaluation coupled with energy crisis has badly hampered our production process. In Pakistan industries rely on imported raw material to manufacture goods. The devaluation of currency means expensive purchase of the desired raw material which in turn raises the cost of production and the consequent raise in the prices of goods. The unavailability of energy to run the production wheel further added to the misery. The export orders are difficult and at times impossible to meet which results in the cancellation of shipments and the loss of valuable foreign exchange reserves.
    The devaluation of Pakistani Rupee against US $ has raised the amount of existing debts (principal + interest) as well. The exchange rate difference increases as the Rupee weakens against US $, now 1 US $ will fetch more Pak Rupees, alternatively more rupees would be needed to pay off 1 US $ due to this increased gap. Hence, the existing availed debt is automatically increased. This difference in exchange parity between Pak Rupee and US $ has further added to the ongoing bleak economic scenario.
    Low foreign exchange reserves to back up the currency results in state bank undertaking the method of deficit financing. In this way, money is minted and provided to the Government to meet the expenses of the Government. The bank then issues the legal tender money as required by the Government to make up the deficit. The principle of demand and supply applies here to and the availability of excess money/liquidity in the market raises inflation. Eventually the economy enters into a phase of hyperinflation where inflation rises day by day and ends up in widening the gap between rich and poor. The same scenario is being experienced in Pakistan with cost of machinery and equipment increasing due to this parity. The rising prices of electronic goods as well automobiles is also due to this reason.  Deficit financing is the modus operandi of failed economies only and the way we are progressing, we certainly seem to be heading in the same direction.
    Till the time this article is written, as per SBP sources, the Government has taken 4.39 trillion rupees of loan during the period from July 01, 2010 till March 12, 2011 (approximately 9 months). Since, the state Bank of Pakistan neither has adequate foreign exchange reserves nor the reserves of precious metals to back up the Pak Rupee. The Central bank has then been left with no option, except to mint money and provide cash to the Government to meet the expenditures by merely printing the currency notes. The adverse effects of this strategy can be easily seen by the ever increasing prices of commodities in our economy.
    However, the excess supply of money/liquidity in the market is then balanced by Central bank by applying stringent Monetary Policy. One of the steps of aforementioned policy is raising the interest rates thus restricting the access of money- a difficult and cumbersome process. Now the entrepreneurs have 2 choices either to avail loans at high interest cost, which raises the cost of production and consequently the prices of commodities. or shut down the business or shift the business to a country where funds can be arranged at comparatively lower cost with some additional tax incentives. Our Country is facing the same problem as many of the local producers have either shifted to other countries or are in a process of shifting. Consequently, the masses are forced to purchase the expensive products produced by the manufacturers or to purchase the imported items available in the market.
    One of the ways to get out of this vicious circle is to reduce the non-productive expenditure by the government. The efficient utilization of available resources is the need of the time, be it a natural resource or the unnecessary spending habits. We, each one of us have to take responsibility on our part to take this country out of the never ending turmoil.