By Muhammad Asad Tahir Bhawana

ISLAMABAD, August 2 (INP-WealthPK): Trade with other countries in its own currency instead of the dollar can control the depreciation of the Pakistani rupee, WealthPK reports.

A major contributor to the current rise in inflation and economic instability in Pakistan is the rapid depreciation of the rupee against the dollar.

The depreciation of the rupee can be controlled by increasing exports and bringing in more dollars. However, Pakistan can’t minimise its trade deficit due to its relatively low exports in comparison to its imports. An effective measure is to increase the demand for local currency in the exchange rate market. It can be made possible by signing contracts with other countries to trade in their currencies instead of the dollar.

Some countries are currently switching from the dollar to their own currencies for international trade to make their currencies stronger. The Reserve Bank of India (RBI) has decided to trade in Indian rupees (INR) with countries such as Russia and Iran. The move will help in stabilising the value of the local currency and decrease the demand for the dollar, according to RBI.

Similarly, China and Russia have started supporting their own currencies during the trade tensions between the United States and China. They have taken several measures like a cross-border interbank payment system in their own currencies to decrease the demand for the dollar.

As part of the March 2020 conference, the finance ministers of the Shanghai Cooperation Organisation, consisting of China, Russia, Central Asian states, India and Pakistan, agreed to finalise a roadmap for bilateral trade, investments, mutual settlements and the issuing of bonds in national currencies. The process has been expedited after US actions during the pandemic.

Following the example of India, Russia and China, Pakistan can sign contracts with other countries through mutual agreements to trade in its own currency. The move will reduce the demand for the dollar and the local currency will become stronger, ultimately resulting in an increase in purchasing power and a decrease in inflation in the country.

Dr. Khalid Mahmood, a public policy expert, said that one reason to demand a currency on the foreign exchange market was the belief that the value of the currency was about to increase. Currently, the value of Pakistan’s currency is only determined by the dollar. If trade with other countries is initiated in local currencies, the demand for the rupee will be increased.

“Pakistan should initiate doing business in local currencies with other states, especially with friendly countries like Saudi Arabia, Turkey, Indonesia, etc. Pakistan imports oil mostly from Saudi Arabia. If Pakistan enters into a contract with the Saudi government to trade in local currencies, it will help Pakistan a lot because the Saudi currency is already pegged with the US dollar and that’s why it cannot be depreciated,” Dr. Khalid told WealthPK.

Pakistan and China agreed to do bilateral trade in local currencies in 2018 when the prime minister of Pakistan visited China. Pakistan needs more such agreements with other countries to increase the demand for its currency to control the depreciation of the rupee and stabilise the economy.

Credits: Independent News Pakistan—Wealthpk