Why Is Pakistani Rupee Depreciating Against Dollar?
Like many other currencies, the Pakistani Rupee (PKR) fluctuates in value regarding the major currencies of the world. The PKR has certainly shown a continuous downward trend during the past several years raising questions about its stability and possible effects on the economy. This article reveals the complex causes behind the depreciation of the Pakistani Rupee against the dollar.
Remittances
For a remittance-dependent country like Pakistan, depreciation of a currency is a two-edged sword’ as the value of remittances may increase in local currency terms but also increases consumption for recipients of remittances.
Effects Of PKR Pressures From Depreciation and Inflation
The Pakistani rupee (PKR) is indeed currently in two struggles-inflation and depreciation, and these have very serious repercussions for the economy. There is also a serious interaction of inflation and devaluation in threatening the stability of the economy in Pakistan. While rising import bills and a falling PKR might cause price increases in commodities for necessities, at the same time, rising inflation shrinks purchasing power and restricts economic activity. Top of Form
It becomes difficult for consumers and businesses to buy much with what they have at rising prices because their money goes a relatively shorter distance as compared to before. This aggravation is worsened with a constant increase in the average price level of goods and services, which only constrains his or her ability to purchase goods and services. Consumer spending, chief engine of economic expansion, may decline as a result of this.
What it actually does is further increase the repercussion of inflation. Since the weak currency costs more PKR for the same amount of imported goods, the imports become costlier. The deprivation of foreign exchange reserves is so marked by the weakening PKR. A weakened currency also requires paying back foreign currencies in PKR, which increases the amount at which the debt must be paid back.
International Economic Factors
Major economic events on the global stage affect the exchange rate of the Pakistani rupee, such as movements in oil prices and changes in those important currencies like the US dollar and the euro. So, when an increase in international oil prices occurs, it raises the import costs that feed additional pressure on the currency. For example, if oil imports mostly depend on imports, it can pressure internal exchange rates as costs go up.
Payments Balance and External Debt
It assesses Pakistan’s state of finances externally by focusing mostly on the levels of foreign debt and payments balance while drawing attention towards an alarming increase in external indebtedness, which was argued to be primarily the result of borrowing through budgetary assistance and infrastructure projects. This has raised questions about the sustainability of the debt. Besides, it must also consider the balance of payments under which the continuous imbalance is created due to high imports and weak export activities.
Conflict In Investor Confidence and Politics
True economic steadiness of a state can be said to be completely dependent on its political atmosphere. Instead of an unfortunate condition, the confidence of the investor may easily be shaken during the unrest or instability of the political scenario governing the country. Foreign investments too can be withdrawn since there would not be a demand for a local currency among the investors, and it might result in the depreciation of the country’s currency.
Interest Rates and Financial Policy
The currency of a particular nation is affected directly by the interest rates set by the central banks of these countries. A central bank may keep its interest rates at very low levels favoring economic development and causing currency depreciation. State Bank has also been making frequent changes in interest rates in Pakistan from time to time according to the economy, which indirectly reflects on the currency value of the rupee.
Financial Pressures
By the same token, inflation is the rate of the increase of the average prices of goods and services; this constitutes a decrease in the purchasing power of money. Pakistan is still on the list of countries that are recently experiencing high levels of inflation among many other countries in the world. The loss of competitiveness in a country’s exports results when the inflation level of that country is higher than that of its trading partners. This eventually leads to a loss in the value of its currency.
Trade Deficits
Currently, one of the biggest reasons for the depreciation of the PKR is Pakistan’s incessant trade deficit. The country regularly rids itself of foreign exchange reserves, as it imports comparatively higher products and services than it exports. Thus, rupee value comes under pressure, making it fall against other foreign currencies as well.
Conclusion
To sum up, the much-awaited depreciation of the Pakistani Rupee is not a simple phenomenon but rather a number of local, national, and international factors. The remedy for this ailment would have to be innovative combinations of measures like managing external debt, efforts for curtailing inflation, realignment of trade flows, and stability in the political environment. For the growth and continued sustainability of the economy of Pakistan, a strong and resilient currency is required.
Read Dive is a leading technology blog focusing on different domains like Blockchain, AI, Chatbot, Fintech, Health Tech, Software Development and Testing. For guest blogging, please feel free to contact at readdive@gmail.com.