Future of Pakistani currency is not auguring well as dollars have dried up in Pakistan and hopes from the IMF for the release of next tranche are nowhere in the seen due to a deadlock in negotiations inspite of Prime Minister Shahbaz Sharif's telephonic contact with IMF Managing Director Kristalina Georgieva requesting for the release of next tranche of IMF programme and easing the conditions for the imposition of new taxes including increase in electricity tariff on Pakistanis which are already reeling under record high inflation coupled with last year's devastating floods inundating one third of Pakistan and inflicting unprecedented losses upto $30 billion.
Traders, students and patients are finding it hard to get the dollars from Pakistani banks to meet their needs. Industrialist sector is also criticising the Government for not opening letter of credit for import of essential items.Credit card spend limits have been curtailed from one lac dollar to thirty thousand dollars per year.
Many experts are of the view that future of pakistani currency is not so bright as it will further slide against dollar as there is no hope of pumping of dollars in Pakistan's economy in near future despite pledges of $10 billion from international community, multilateral and bilateral resources during Geneva financial aid conference held in the backdrop of last year's unprecedented floods that played hovac with the lives and property of people of Pakistan, which will start pouring in next three to four years.
The situation going further deteriorated with dwindling down remmitences from overseas Pakistanis since when the present government took over the reins in April 2022 by toppling the Imran Khan's government by winning a no confidence move.
Hoarding of dollars for future gains and smuggling to Afghanistan have also played its part to destabilise the PKR.
Political instability is also huge factor in the depreciation of currency.
As well as low exports and heavy imports and high interest rates are weighing heavily on Pakistani currency being depreciated sharply in open market thus opening flood gates of inflation.
At the appointment of Ishaqe Dar as Pakistan's Finance Minister dollar slide to 217 rupees from 236 rupees against PKR in few days and he made huge claims to cut down PKR and USD exchange rate to 200 rupees very soon but till todate it remained a dream that never come true.
Now a days PKR and dollar inter bank exchange rate is hovering around 228 rupees while open market dollar rate is vacillating around 250 rupees, thus finance minister finding it a tough job to maintain the PKR dollar exchange rate as claimed earlier.
Factors Determining the value of Currency:
The value of currency of any country is determined by the market forces of supply and demand in the currency market which is influenced by multi-faceted factors like:
1. Interest rate
2. Capital flow
3. Inflation
4. Money supply
5. Political and economic stability
Types of Exchange Rates
1. Fixed exchange rate
2. Floating exchange rate
3. Managed exchange rate
Fixed Exchange Rate
This exchange rate is determined by the government and not by the market forces of supply and demand.
Floating Exchange Rate
In this exchange rate value of a currency is allowed to adjust freely or to float as determined by the market forces of supply and demand in the currency market.
Managed Exchange Rate
This exchange rate is partially allowed to fluctuate, government does not allow fluctuation of more than 1 to 3 percent, so neither fixed nor free.
Dangers Looming over Future of Pakistani Currency
IMF is pressing hard to increase the energy prices, imposition of new taxes and more importantly let the rupee to gain its real market value as currently there is a gap of nearly 50 rupees between inter bank and open market PKR to USD exchange rate, thus complying with IMF instructions will increase inflation which is already touching 30 percent all time high.
Bloomberg economics risk model revealed that odds of Pakistan facing a currency crisis surpassed 50% after devastating floods.
Japanese finance holding company Nomura has also reported that currency of seven countries including Pakistan is in crisis.
Moreover, ex finance minister of Pakistan Miftah Ismail writes in his recent article in Dawn that
"Pakistan has to pay $21 billion to foriegn lenders during current fiscal year and during next four years it will have to return similar or larger amounts each year totalling about $70 billion."
From where Pakistan will pay back such huge amounts to the lenders? The answer is that Pakistan will borrow from other lenders hence will stuck up in debt quagmire.
To come out of this debt trap Pakistan has to increase its exports, attract more foriegn investment by creating peaceful environment, widening the tax net by incorporating retailers, wholesalers and the agriculturists.
Ray of Hope for Pakistan
🇸🇦 Saudi Arabia is intended to deposit $2 billion in SBP to shore up the already deposits of $3 billion making it to $5 billion in total.
Moreover, KSA has shown interest of long and medium term investment of $10 billion in petroleum sector.
🇦🇪UAE is hoped to give $3 billion as financial support to Pakistan alongwith rollover of $2 billion dollars forex reserves deposited with State Bank of Pakistan.
🇨🇳 China is going to inject in $9 billion dollars in Pakistan's economy by rolling over of sovereign loans, refinancing of Chinese commercial banks loans.
🇶🇦 Two LNG terminals are being sold to Qatar which expects to bring $1.5 billion in the national exchequer.
International community, multilateral and bilateral lenders pledges $9 billion for Pkistan to come out of climate induced crisis.
Thus pouring of dollars at varying pace in future may stabilise the currency and most importantly it lies on Pakistan to smartly use the aid to curtail the miseries of the people.
Conclusion
Taking in account the fledgling political and economic situation, low remmitences,no foriegn direct investment in the making, interbank and open market USD exchange rate disparity, electioning year, tough IMF conditions including letting the PKR to gain market value, hoarding and smuggling of dollars to Afghanistan and more importantly political turmoil in the country are all are signalling that future of pakistani currency is in doldrums and will further slide in the days to come.
It is the need of the hour that the government shore up forex reserves by increase exports, finalising the IMF programme by escaping tough conditions to materialise the loan from other lenders as well.
Decrease in the non developmental expenditure, institutional reforms, widening the tax net and bridging the current account deficit gap, are the steps to stabilise the Pakistani currency.
Written
by
Shabbir Butt
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