By Muhammad Asad Tahir Bhawana

ISLAMABAD, July 15 (INP-WealthPK): Despite a hike in the key interest rate to 15 percent in July for the sixth consecutive time, the Pakistani rupee remained under pressure above 207 per USD, not far from its historic low of 211.5 hit in late June. In addition, the monetary board forecasts that headline inflation will likely remain elevated for most of 2023 before settling to the target range of 5-7 percent by the end of 2024, reports WealthPK.

So far this year, the rupee has fallen almost 18 percent as the South-Asian nation grapples with record imports, worsening current account balances, and declining foreign exchange reserves. Pakistan has recently reached an agreement with a Chinese consortium of banks for a $2.3 billion loan facility while awaiting the disbursement of a USD3 billion bailout loan from the IMF.

A sharp rise in the prices of commodities in the international market has created a situation of worldwide inflation. Severe inflation affected the balance of payment (BOP) situation in Pakistan, which was already in a critical state. Worse BOP conditions led to a decline in foreign reserves, which eventually depreciated the rupee. Owing to this effect, domestic inflation increased.

With the sudden rise in the global supply chain disruption, international commodity price rises have negatively affected the current account deficit as it widened to $13.8 billion in July-April 2022 from $1.9 billion in FY 2021.

According to Dr. Ali Chaudhry, Research Advisor at the State Bank of Pakistan, if inflation grows faster than the economy, it usually reduces people's purchasing power and living standards. The rise in inflation makes the goods expensive, which reduces the value of money to buy a particular commodity.

Moreover, inflation usually occurs when a currency depreciates because imports become more expensive. Pakistan imports a lot of necessary products, such as oil and technology. When the currency depreciates, these goods become expensive, leaving producers with no choice but to transmit the additional costs on to the consumers.

Further, the exchange rate depreciation also leads to increased liabilities denominated in foreign currency. Pakistan is a country that has an accumulative foreign currency debt. Whenever the currency depreciates, the foreign debt rises in terms of local currency.

Pakistan is stuck in the vicious cycle of currency depreciation because of a lot of reasons. Here are a few measures which can help the country come out of this situation.

Firstly, the State Bank should increase the interest rate, reducing the demand for goods and services to save more money.

Secondly, a huge amount of foreign direct investment and promotion of portfolio investment is the need of the hour which will bring dollars in the country to make its BOP self-sustaining.

Thirdly, the private enterprises must be incentivised by the government to be self-sustained to import machinery, raw material, and technology on their own.

Fourthly, the State Bank of Pakistan has also introduced a new law (State Bank of Pakistan Act) to stabilize the rupee so that the currency can perform its function of store of value. This move will help stabilize the value of rupee.

Lastly, exports must be increased, and local businesses must be encouraged to compete with the imported goods to reduce their demand. Through this channel, the foreign reserves can be increased, ultimately stabilizing the local currency.

Credit:

Independent News Pakistan-INP