Why the dollar is rising in Pakistan?

Why the dollar is rising in Pakistan?
  • Money is something that we use every day. We work hard day and night to earn it and buy the necessities of our everyday life. We don’t really think much about it or how it works around the world as a currency, especially in the Forex i.e. Foreign Exchange Market.

    Ok, for people who are not economics students like me, let me explain how it works and why there has been so much chaos about the dollar rate rising in Pakistan in past years, especially these days.

    First of all, we need to understand how a currency makes a country’s economy stronger. To increase the flow in the foreign exchange market a country should have a high demand for imports from abroad.

    The next factor that defines a stronger economy is a balance of trade which means if a country exports more than imports, it will surely increase its value in the market. Attracting investors into your land is an important requirement for any country to flourish its economy. Foreign investors take stakes in existing companies or they buy, sell and trade securities in the recipient market.

    When a country offers high-interest rates, it most likely can attract investors from around the world and that is why the U.S dollar is the strongest country these days. The U.S central banking system called the Federal Reserve Board is offering higher rates than any other central bank to avoid inflation.

    The points I mentioned above represent a country that has a strong currency such as the U.S and countries that don't have a strong balance of trade or capital flows end up with weak currency like the Pakistani Rupee. In today’s time, people wonder why the dollar rate in Pakistan today is rising like a hot temperature. The most common reason for this is the number of imports made by Pakistan from the U.S which has the lowest number of exports.

    Another reason is the increasing pressure of funds borrowed from the World Bank and this is another weak point of Pakistan that helps the Dollar’s rate to be the highest and most powerful currency of 2022.

    The highest dollar rate in Pakistan’s history is 236.0292 PKR as recorded on 27th July 2022.

    How does the rise in the Dollar Affect Pakistan’s Economy

    A rise in the Dollar is a major encouragement to inflation. From petrol to medicines and books. Sadly our economy heavily depends on imports which have been banned lately in order to encourage export of the country. Pakistan currently is suffering a shortage of Dollars as well which is creating a dislocation in the Forex.

    Another reason behind the shortage of dollars is the delay in its bailout program from the IMF (International Monetary Funds) which provides loans to achieve growth and prosperity to underdeveloped countries like Pakistan. The shortage is also causing a delay to importers for their overseas payments for more than a week.

    Actions that should be taken to Bring down U.S Dollar in Pakistan

    Even though there is a daunting rise in the dollar rate, it does not mean doomsday for the Pakistani Rupee. There are actions that can be taken in order to discourage growth in the dollar’s strength.

    In the past, such attempts were made by China and Pakistan as both countries decided to trade in their local currencies and abandon U.S dollars while trading with each other. Along with China, Turkey also showed approval of this strategy as it highly encourages the end of the dominance of the U.S dollar. Within Pakistan, the citizens can help to boost the economy by discouraging the purchase of imported products and choosing local products which are available at reasonable prices in the market.

    If we look at our daily lifestyle, imported products have become important must-haves in our households. From edibles to home appliances to clothing, which we buy with our hard-earned money, it leads to weakening our country’s currency. Last but not the least, if we have stocked up dollars in our bank accounts, we should get them in exchange for our currency, which can be used to spend on our local business. Freelancers are highly advised to withdraw their money in Pakistani Rupee, so it can benefit the economy.

    The journey from Dollar to PKR has been bumpy and Dollar seems to have an upper hand for now as we are well aware that U.S Dollar is the king of the foreign exchange market but taking such actions could provide a safer future for the Pakistani rupee in the marketplace.

    Dollar Rate in Pakistan from 1947 to 2020

    It was assumed that USD was equal to Pakistan rupees in 1947. Economists claim no exact value one can suggest as on the eve of independence Pakistan had no balance of borrowing outside so there is a good possibility that PKR was equal to USD at that time.

    In 1971 Prime Minister Zulfikar Ali Bhutto took a huge step of transferring all major banks in Pakistan, in order to increase government control over the economy. This caused an enormous dip in Pakistan’s currency that couldn’t recover until 1978.

    There were also suggestions that Pakistan’s currency couldn’t be equal to USD at that time as it was a British colony and its direct link was British pounds. In 1947 Pakistan did not adjust to the U.S dollars but as in the early 70s, the USA started dominating the whole world. Pakistan's government had to adapt to the rising currency.

    In 2020, before the Covid outbreak, PM Imran Khan had declared happily to the nation about the stability of the economy in Pakistan, which was followed by a press release by the finance ministry that the economy was progressing positively. Soon after Covid stepped into the country, it made a massive drop in exports and foreign remittances. Imports were also affected as most of the imported materials were those on whom exports depended heavily.

    The dollar rate in Pakistan from 1947 to 2020 has been a roller coaster ride. At the time of the independence, Pakistan’s economy was flourishing and stronger than today, as the economy has gone weaker due to unstable political conditions, overwhelming loans, and interests. Despite the predictions of the government, the results could have been catastrophic post-Covid but luckily it wasn’t as bad as predicted now in 2022 as the dollar is on the rise, the Pakistani Rupees is suffering once again.

    The Future of the Pakistani Rupee

    The dollar rate in Pakistan today is stronger and so far is stable in the marketplace. The Pakistan rupee is expected to make a comeback in August however the analyst, forex traders, and the market claim the depreciation of the rupee in July was surprising as economically the country is doing better despite the political chaos happening in the country.

    There is a possibility of a stable currency if the IMF (International Monetary Funds) approves a loan of $1.2 billion as it may help in steadying Pakistan’s economy. There might have been a chance of stabilizing the rupee but sadly exporters are not buying back foreign currency resulting in a shortage of dollars.

    Last week the ban on imported items was removed except mobile phones, home appliances, and automobiles. The ban on imported items has helped in making the position of the rupee slightly better.

    Inflation in Pakistan Today

    However, the ongoing inflation in the country isn’t helping in boosting the Pakistani currency either. The huge rise in prices of electricity, petrol, and the cost of food has left the Pakistani Rupee weak.

    Inflation is one of the biggest challenges for the Pakistani Rupee right now as it creates uncertainty and lowers investments which scares off investors from spending their money on the country. It goes without saying it increases instability and stops the growth of the economy.It has also led to lower international competition as the number of exports is marked down. Interest rates are likely to go higher which can create affect the savings of the elderly.

    The Effect of the rise in Dollar

    The highest dollar rate in Pakistan since July has been recorded at 236.0292 PKR. This is the highest amount at which the dollar has been recorded currently in Pakistan.

    For Pakistan to maintain a healthy currency, it needs to overcome inflation, attract investors, and lower interest rates. Countries like India and Bangladesh don’t have to rely on the IMF (International Monetary Funds) but unfortunately, we do as our country has an unmaintainable growth.

    The battle of the currencies has been going on for decades now and what matters is how underdeveloped countries are fighting off to protect their ground.

    The currency rate in Pakistan does have the potential to strengthen its value in the marketplace only if we as citizens and our government take the actions required in the respected sectors and promote export and decrease negative inflation as much as possible, rather than solely depending on loans from friendly nations and IMF (International Monetary Funds).