SUDDEN RISE OF DOLLAR IN PAKISTAN
Like all other aspects of economics, currency is also important aspect of economics. In Pakistan currency plays an important role in Economy of Pakistan because it affects inflation and many other things in many ways. Especially the rise of dollar and fall of PKR play major role in economy of Pakistan. In June 2017 the rate of dollar is 102.98 and now it is 111.45. This is not first time the sudden rise of dollar in Pakistan. But from last four decades it is increasing slowly or rapidly. Anyhow this sudden rise of dollar in six months is almost 8 percent. I will discuss here what the possible reasons for this sudden rise are? And I will also tell you what the reasons behind strengthening and weakness of currency are?
Government or Central Bank Intervention:
The influence of Government or Central Bank plays an important role in currency. For example if Pakistani Government wants to increase the value of PKR they will approach the central bank and central bank will increase the selling of dollars in bank market. In this way they will increase the supply of dollar which will decrease the value of dollar and increase the value of Pakistani Rupee and in the same way when they want to decrease the value of Pakistan Rupee they will either buy or stop the supplying of dollar which will increase the value of dollar and decrease the value of Pakistani Rupee. Many economist think that this is the major reason behind sudden rise in dollar because they think the after the disqualification of Nawaz Sharif, Government want to believe people of Pakistan that after Nawaz Sharif economy of Pakistan will be no more stable.
One of the most important factors which influence currency of the country is Government Debt. Government Debt causes inflation in country and it does not gain foreign capital and as a result foreigners will sell their bonds in open markets which lead to decrease in currency. If we look at Government of Pakistan Debt in Jan 2016, it was 68452 USD million. And in July it was recorded 85052 USD million. It means 25 percent increase in Government Debt within 18 Months.
The relation between export prices and import prices is named as terms of trade. If country exports are more than import then we will see the increase in the value of currency but when imports rise and exports fall then there will be decrease in the value of currency. If we see last year imports were more than exports. Imports: 516015 PKR Million
Exports: 208036 PKR Million
Political Stability and Governance:
The political stability and good governance always is a magnet for foreign investors. Political stability means that there are no political chaos in country and no protest on the roads from political parties and good governance means there is stable economic policy and rule of law. If these things are not happening then foreign investors will draw their investment and this will affect currency. If we look at the previous year there was a political chaos in the roads on Pakistan and there is no rule of Law as political parties are on the road which destabilizes the country economy badly. And also case against country prime minister in larger court of Pakistan also affects the country economy badly.
The decrease in country GDP for more than two quarters in year will be named as economic recession of that country. In that case country fails to gain overseas capital because of fall in interest rate.
These are the few possible reasons behind the sudden rise of dollar in country. Hope you will now easily understand the reason of sudden increase in the value of dollar. Now we will go for possible solutions to strength the currency of our country.
Foreign Exchange Reserves:
Country currency becomes strong by selling foreign exchange reserves. But Pakistan foreign exchange is decline from 20400 USD million to 19763.20 USD million. If Pakistan sell few of his foreign exchange reserves then it will increase the supply of dollar and increase the demand for PKR but that will decrease in Foreign Exchange Reserves.
Interest Rate is one of the key factor in strengthening of currency. Higher interest rates would attract foreign investors but in the same way it lead to inflation. It may decrease the economic growth specially when economy of country is not in good condition i.e in recession cases.
Investors always look for future. Therefore they are always try to predict or forecast. For example if we look at present situation in Pakistan economy is not stable more over there is less rule of law corruption charges on government by opposition and there is no stability in policies and political stability then foreign investor will be thinking of their investment and they will move their investment to other country.
As I early said that government can intervene to decrease or increase the value of dollar. Pakistani Government can give directions to central bank to increase the supply of dollar in market which will decrease the value of dollar but it will be not a long term policy it is just a temporary technical solution to avoid from criticism.
Increase in Exports/ Decrease in Exports:
Pakistani Government should make such policies which increase our exports and decrease imports. Increase in exports will increase the value of PKR. So what policies can make our exports more?
Well this last question will be answered in our last article. Here we give the possible reasons of sudden rise in dollar and possible solutions to decrease the value of dollar. But there are few questions rising in our mind now.
- Will we see stable economy of Pakistan in 2018?
- Will we see political stability in Pakistan in 2018?
- Will we see stable policy in 2018?
- Will we see stable government in 2018?
Well the answer for all these questions are “Hope for best”