The Pakistani rupee has significantly devalued against the US dollar in recent years, reaching its lowest point historically in May 2019. This devaluation is worsening Pakistan's already struggling economy by increasing the cost of imports and debt repayments. Multiple domestic economic issues are contributing to the rupee's decline, including large trade deficits, over-reliance on foreign aid, and political/security instability. While devaluation could boost exports in the long run, it is increasing inflation in the short term and hurting Pakistan's import-focused economy. The government and IMF are implementing measures to stabilize the currency, but Pakistan faces a difficult economic situation without long-term reforms.
1. 1
DEVALUATION OF PAKISTANI RUPEE
MAHNOOR MALIK
04151713070
BSBA-4B
PAKISTAN ECONOMY
26th MAY, 2019
QUAID-E-AZAM SCHOOL OF MANAGEMENT SCIENCES
QUAID-E-AZAMUNIVERSITY ISLAMABAD
2. 2
ACKNOWLEDGEMENT:
I would like to express my special thanks of gratitude to my instructor Mr. Omer Siddique
who bestowed upon me a golden opportunity to work on this wonderful project
“DEVALUATION OF PAKISTANI RUPEE,” which helped me in doing a lot of research.
This project really helped me in increasing my skills and my knowledge about the current
economic crisis of Pakistan and about the necessary measures that are needed to be adopted to
address these issues. I am really thankful to him.
3. 3
DEVALUATION OF PAKISTANI RUPEE
The economy of Pakistan is going through a rough patch these days. The unfavorable
prevailing economic condition has created much chaos and confusion for a common Pakistani.
People of Pakistan are not certain about what is going to happen in next few days. To top all
this, the international institutes are blaming Pakistan to deteriorate its own economic figures,
thus Pakistan is having extremely volatile environment. All this situation is quite worrisome as
it is expected to create much trouble for the country in years to come.
To add fuel to the fire, another major unavoidable problem faced by Pakistan is “ The
Devaluation of Pakistani Rupee, ” which is further worsening the economic condition of the
country. The term Devaluation of a currency means a decrease in the value of a currency of a
country with respect to any foreign currency such as USD. This issue is creating many
problems for the already stumbling economy of Pakistan. For example, if the value of Rupee
continues to fall as compared to USD, the exchange rate rises – that means now it will take
more rupees to buy 1 USD. As it can be seen: In December 2017, the value of Pakistani rupee
in accordance with US Dollar was noted as PKR 105 that rose to PKR 135 in October 2018
and now in May 2019, it has further devalued and reached the lowest point in history at PKR
153. The rupee’s accumulative devaluation has reached to over 9.5 percent, causing a $7.6
billion increase in loans / debts - all without borrowing a cent. ((Retired), Why is the rupee
falling?, 2018) Another reason for this devaluation of currency is an increased exchange rate
due to changing demand and supply of Pakistani Rupee and USD.
This is not the first time that rupee has devalued. Historically, it has been devalued by over
2100 percent over the past 70 years. The recent series of devaluations started in July 2017.
When just 3% devaluation of rupee was considered as the worst fall in a decade. Then a series
of blame game started between then Finance Minister Mr. Ishaq Dar, the State Bank of Pakistan
4. 4
(SBP) and the market stakeholders. The Finance Minister called this depreciation artificial and
reversed it.
There are many reasons that caused this devaluation of Rupee – whatever it may be, it is a
strong reflection of country’s weak economy. ((Retired), Why is the rupee falling?, 2018)
The currencies do not value or devalue over a fortnight rather this is a phenomenon that takes
years to happen. There are multiple factors that are involved in making the value of currency
vibrant or dull. The most important factors include the existing imbalance between imports and
exports, too much dependence on foreign aids to cover the deficit, a very low GDP per capita.
Prevailing political, security and geographical instability. The depreciation in value of rupee
has also increased the cost of manufacturing goods and doing business in international markets.
Another aspect of devaluation of currency is that it increases the exports but since Pakistan has
basically an import oriented environment, so this devaluation will definitely cause a rise in
inflation and import bills. Thus this devaluation of rupee is the result of domestic economic
mismanagement, that is based on artificial and short-term measures rather than a long-term
planning that leads to the domestic economic failure. In short time period, it may be favorable
for the economy but in the long run it may be a loss of whole economy. (Mahmood, Uzma Zia
and Dr. Zafar, 2012)
Initially, the Pakistani rupee was linked with British Pounds until 1971 when it was pegged
with USD. In 1982, the mechanism of managed floating exchange rate was adopted that helped
Pakistan in reducing the gap between the market rate and official rate. In 1991, Pakistan
introduced many financial reforms but during 90s Pakistan had to face many sanctions as a
result of atomic explosions.
The economy of Pakistan is showing visible signs of vulnerability despite repeated claims made
by the last and current governments’ about the economic condition being brought under
control. In reality, the foreign exchange reserves are declining by almost $3 billion over the
5. 5
last few months. And this rapid depletion is still going. The country is running on trade current
account deficits that means increase in the outflow of currency in terms of imports as compared
to the inflows of currency in terms of exports.
In 2015, the current account and trade deficit were $3.12 billion and $22.16 billion respectively
followed by an increase of $5.49 billion to $23.9 billion in 2016 and further it toppled $12.49
billion and $32.48 billion in 2017. (PKR vs Dollar: The dilemma of falling rupee, 2018;
Hassani, 2018) Despite all these depreciations in Rupee’s value, IMF claimed that the Pakistani
rupee was kept overvalued by 20% in 2016 after which State bank of Pakistan couldn’t kept
up with overvalued rate of exchange since it badly affected the exports of the country.
Last year State Bank of Pakistan has devalued Pakistani Rupee on purpose to support the
already crippling economy in dealing with increasing fiscal deficit and lack of foreign
reservoirs. But this year Pakistan is expected to need a lot more sums to avoid balance of
payments and fiscal deficits.
The IMF predicts that Pakistan’s economic growth will fall from 5.2% in 2018 to 2.9%, this
fiscal year. (Pakistan to get $6bn IMF lifeline to ease economic crisis, 2019) Whereas the
condition is kept on worsening since the foreign loans have exceeded $90 billion and SBP has
only $8 billion left in foreign reserves.
The Pakistani economists and analysts hold two different types of opinions amidst this currency
devaluation fiasco. Some believe that self-correcting mechanism of demand and supply would
balance it. Others think that Pakistan has to reach out to IMF to seek bail – out due to widening
gap in current account deficits but this option has its own cost and consequences. It will make
Pakistan to fall under more debts and discourage potential investments – creating further
imbalance that leads to Pakistan economy to become fragile.
Pakistan has secured a $6 billion bailout from the IMF as the country strives to deal a serious
economic crisis. (Pakistan to get $6bn IMF lifeline to ease economic crisis, 2019) But it is quite
6. 6
possible that IMF would demand painful structural reforms that would harm the integrity and
stability of the economy of the country. IMF can ask Pakistan for a further rise in SBP’s policy
rate that will cause a rise in inflation and to adopt a free-float exchange rate rather than a
managed floating exchange rate that is already been practiced in the country. This simply
means further devaluation of the rupee.
When the value of Pakistani rupee touched an all time low against US Dollar, Prime Minister
Imran Khan constituted a committee to control this devaluation and capital flight from Pakistan
on urgent basis. The committee has agreed upon reducing the carrying of $10,000 by anyone
travelling abroad from Pakistan to $3000. The committee gave recommendations to the Prime
Minister on how to control the devaluation of rupee. PM Imran Khan thinks this devaluation
of rupee to be a source of humiliation for Pakistan before the world. According to the
Government’s spokesperson, there is no shortage of foreign exchange in Pakistan but it requires
proper management.
The government is also intending to reduce imports, this step is going to help cut import bills
up to $10 billion annually. Even in such terrible economic conditions, most exchange
companies are playing safe. They are not selling dollars – just buying them, this leads to an
increase in dollars’ demand resulting an increased inflation, causing Pakistani rupee to
depreciate further.
Indeed, the economy of Pakistan is going through a rough patch these days. Pakistan is
basically a developing country but today the country is over-burdened with heavy debts. The
exports are not up to mark and revenue collected from taxes is insufficient. The next few
months are expected to be tough for the Government as the rupee can devalue further and that
would lead to further inflation. These economic crisis can not be resolved over fortnight rather
a proper planning is required to deal with such crisis. Aid from foreign countries like Saudi
Arabia, China and institutes like IMF and World Bank can only provide some breathing room
7. 7
in the short term to the already shattered economy with its own serious consequences.
Promoting investment oriented environment by increasing manufacturing, broadening the tax
base and by encouraging exports and discouraging imports, by keeping investments in rupees
and by boycotting USD savings. The Government and State Bank of Pakistan need to stabilize
the currency and stop it from devaluation by regulating their strategies and policies.
These are just some urgent measures the Government can adopt to address the ongoing
economic crisis before it gets too late to rescue the value of Rupee and the Pakistani economy.
*******************************
8. 8
Bibliography
(Retired),B.M.(2018). Why is therupee falling? Lahore: DailyTimes.
(Retired),B.M.(2018). Why is therupee falling? Lahore: DailyTimes.
Hassani,F.(2018). PKR vsDollar: The dilemma of falling rupee. Islamabad:Dunya.
Mahmood,Uzma Zia and Dr. Zafar. (2012). ExchangeRateDepreciation and ExportPrice. Islamabad.
(2019). Pakistan to get$6bn IMFlifeline to easeeconomiccrisis. BBC.