ISLAMABAD:
Debating the value of the dollar is a favourite pastime of our nation. Its value is often considered an indicator of the economy and the government’s performance.
We often hear that during Zia’s martial law, the dollar was available at Rs11, while today’s government let it touch Rs340 two weeks ago. Estimates are already being made about when the dollar’s value will rise again after the current crackdown.
Since the dollar is not Pakistan’s mainstream currency, its fluctuations are based on supply and demand, much like other commodities in the market.
Dollar’s supply has five possible sources: exports, remittances from overseas Pakistanis, foreign investment in Pakistan, foreign aid, and foreign loans. On the other hand, the demand for dollars has four sources: our imports, repayment of foreign loans and interest, profit remittances by foreign companies, and payments by Pakistani citizens for international travel, education, residency, and shopping.
Generally, the dollar’s value is determined at the intersection of this demand and supply. From 2013 to 2017, the dollar’s value remained fixed at Rs105 because these market forces were balanced at this rate.
Critics of this period’s policy could argue that the availability of foreign loans in dollar supply and a relatively lower amount of loan/ interest in demand contributed to this balance and the low dollar value.
After 2017, the dollar’s value started rising abruptly, touching Rs180, which later stabilised at Rs160 during the Covid era.
Following the change in Afghan government in August 2021 and the Ukraine war in February 2022, the dollar’s trajectory brought it to Rs300, even after many governmental interventions, and its future outlook remains concerning.
The question is, what happened after 2017, because of which dollar’s ascent could not be arrested? Around this time in India, the dollar went from INR 65 to 82, an increase of about 26%. In Bangladesh, it went from BT 77 to 106, about a 28% increase.
However, in Pakistan, this depreciation touches 185%, which is certainly very alarming.
Simply put, a country’s exchange rate decline should be equal to the annual difference in inflation rates between that country and its trading partners.
For example, if Pakistan’s inflation is 30% and in Europe/ America it is 5%, then the annual depreciation of Pakistani currency should be around 25%. However, for this simple equation to hold, all other indicators such as the current account, trade account, international payments, interest rates, etc should remain consistent and not undergo major changes.
In Pakistan, after 2018 and especially after the US withdrawal from Afghanistan, two significant developments have emerged. One is the hindrance in our access to international loans/ aid, partly due to Pakistan’s growing geostrategic irrelevance, and the second, our accumulated debt from previous years, which is now becoming due.
In 2001, under similar circumstances, the 9/11 event occurred, and we went from a near-default situation to being showered with dollars. However, this time it seems our ability to take loans and aid in dollars is diminishing, and we are not getting any relief in the amount to be repaid.
In addition to that, due to upcoming capacity payments to the newer power plants, our foreign debt servicing is going to increase from the usual $10-15 billion per year to $25-30 billion in next 10 years.
Amidst all this chaos, a significant increase in dollar demand has come from our wealthy citizens converting their amounts into dollars. Business people and the affluent have invested these dollars to reap benefits, while the upper middle class has converted their savings to safeguard against excessive inflation.
From the fluctuations in prices, it is estimated that $5 to $10 billion have been stored both inside and outside Pakistan. Over the past three years, in addition to Hawala/ Hundi transactions, the under-invoicing of imports and over-invoicing of exports have been resorted to excessively, evident in the form of solar import over-invoicing.
The role of markets in Landi Kotal, Chaman, and Taftan in the physical transfer of currency cannot be ignored. Furthermore, significant currency transfers have been made under the guise of Umrah, Hajj, and pilgrimages. Many dollars are still stored in home safes, bank lockers, and treasuries.
This added demand has pushed the dollar, which, according to Moody’s, should be at 245, to reach 300. It’s essential to remember that such a situation can be temporarily controlled, but until we bring the informal forex market entirely into the documented loop, force people to withdraw dollars through market mechanisms, and block undue currency transfer routes, achieving a rate of Rs250 per dollar will remain elusive.
To get a lower rate, we have a lot to do, and the path is challenging for the next 10 years. Increasing production capacity and doubling exports is not easy, but not impossible either. Import inflation is undoubtedly painful, but perhaps we may switch from Porta to local commodes, from Fotile to Super Asia, consider EVs instead of petrol, and transition to solar power for electricity.
In the fiscal year of June 2022, the State Bank received $70 billion, and there were payments of $100 billion. The difference of $30 billion was provided through loans, etc. Under these circumstances, if the currency’s value doesn’t drop by 30% annually, it’s a win.
On the other hand, despite a 22% policy rate, our note printing pace (driven by economic necessities) hasn’t slowed.
Our money supply, ie, M2, has risen from Rs15 trillion in 2018 to Rs32 trillion now. Just looking at this measure, one can understand why local goods and services’ prices would double.
It is essential that appropriate and continuous documentation and regulation of the movement of foreign exchange is done, the increase in money supply should be kept at a suitable multiple of the increase in national income, and productive capacity should be enhanced so that exports can also increase, and there is self-reliance on local goods.
The task is undoubtedly challenging, but many countries, including Vietnam, have demonstrated achieving all this in just a couple of decades. The situation isn’t as dire as it was in Zimbabwe in 2010 or in Venezuela currently, where the dollar reached billions and trillions against the local currency.
If somehow panic buying by people is controlled, then the currency will easily appreciate by Rs25 to Rs50. The rest requires hard work, efficiency, and progress. The ailment is not incurable.
It can be summed up by Iqbal’s following verse: “The splendour of Mount Sinai is there, but Moses is nowhere in sight.”
The writer is a career civil public policy practitioner, working in the public development sector
Published in The Express Tribune, October 2nd, 2023.
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