You may have heard that the dollar rate is rising in Pakistan. This rise can have an impact on interest rates and inflation. It can also deplete the country’s currency. There are several reasons for this rise. This article will discuss some of them. Read on to discover why the dollar rate is rising in Pakistan.
Factors behind rising dollar rate in Pakistan
The US dollar has gained in value in Pakistan in the last few years, especially against the Pakistani rupee. The depreciation of the rupee has reduced the purchasing power of the people and pushed the dollar rate up. This also increased the inflation level in Pakistan. Different economic factors, such as trade, foreign direct investment, capital flow, and international reserves, influence the rate of exchange. Each change in the rate causes a different impact on the economy. For example, a rising dollar value will increase the demand for export products, while a falling dollar value will decrease demand.
The current account and trade deficits in Pakistan have increased. As a result, the country has dwindled its foreign exchange reserves to USD 7.5 billion. As a result, Pakistan has had to take billions of dollars in loans from China, Saudi Arabia, and international lending institutions. The government has been facing a difficult time paying its debts, and officials are starting urgent negotiations with the International Monetary Fund (IMF) to get a bailout package. The Finance Minister has assured the IMF that the coalition government will stay in office and implement economic reforms to help the country.
Another factor driving the dollar rate in Pakistan is the terms of trade, which compares export prices with import prices. These terms of trade are important for both the current account and the balance of payments. If the domestic price level is low in terms of exports, then the currency’s value decreases and the country’s dollar reserves fall. This drives the dollar rate up. However, the economy of Pakistan has sufficient dollar reserves to meet its import needs, but the country needs to limit its imports of luxury goods.
Remittances from overseas Pakistanis are also important for the economy of Pakistan. These remittances act as a catalyst for the financial markets of developing countries and are one of the largest sources of foreign exchange earnings in the country. However, the practice of hoarding US dollars for profit poses a moral dilemma for many people in Pakistan. Many religious scholars have condemned the practice, calling it a grave sin.
Impact of rising dollar rate on inflation in Pakistan
Inflation in a country is determined by the amount of money spent in a given period. A high rate of inflation depresses the growth of the economy and slows the pace of economic growth. In Pakistan, the Consumer Price Index (CPI) is a measure of consumer prices. It is calculated based on prices for four hundred and seventy-seven different items, collected from 76 markets across forty cities. Food and non-alcoholic beverages make up more than 30% of the CPI basket. The Government of Pakistan has set an inflation target of 11.5% for fiscal year 2022-2023.
Unlike many developing countries, Pakistan’s inflation rate has remained relatively low. Between 1980 and 1993, Pakistan’s average annual rate of inflation was 7.4%. This was considerably lower than its South Asian neighbors. This was due to a number of factors including improved performance in the commodity-producing sector, reduced public expenditures, and a turn-around in the nationalization policy. While Pakistan’s inflation rate remains at a moderate level, its policymakers should do everything possible to reduce it.
Rising dollar rates have negatively affected the cost of imported goods in Pakistan. It has pushed the value of the rupee down, particularly in the services sector. Because of this, dollar-based wages are falling. This is making Pakistan’s economy even more vulnerable to the effects of a rising dollar rate.
Rising dollar rates in Pakistan are not likely to result in inflation. Nevertheless, stability of the nominal exchange rate is often desirable for many reasons, not least of which are concerns about inflation. While inflationary concerns are legitimate concerns, the results of devaluation are different in other major currencies.
Rising dollar rates have a negative effect on economic growth. In Pakistan, the inflation rate has a negative correlation with GDP growth, but this negative correlation does not persist for a long time. While high inflation depresses growth, low inflation encourages high productivity and an increase in output levels. In Pakistan, there are numerous economic variables that impact economic growth. Several researchers have studied the relationship between these variables and economic growth. In this paper, we analyze these relationships between three independent variables.
Rising dollar rates increase import prices. In Pakistan, the average consumer price inflation for July was 24.9%, a slight increase from the previous month. This was caused by increased oil prices and an increase in the demand for food and other commodities. Despite the rise in prices, inflation in the country has declined after a continuous increase from 2007 to 2008. This decline can be attributed to a strong improvement in the macroeconomic fundamentals of the country.
Impact of rising dollar rate on interest rates in Pakistan
A rising dollar rate is putting more pressure on Pakistan’s economy and interest rates. The economy has been suffering from inflation and the prices of basic commodities have gone up. Current account and budgetary deficits have increased. Government spending on PSDP has been curtailed, resulting in higher unemployment and poverty ratios. As a result, financial borrowing has become expensive and this has affected large-scale manufacturing.
In order to curb the growing inflation, the SBP has increased the key policy rate by 150 basis points to ten percent. However, the central bank has sharply cut its growth forecasts and warned that rising inflation, current account deficits, and inflationary expectations pose major risks to the economy. The country’s average headline inflation rate has risen to 5.9 percent this year, up from 3.5 percent in the same period last year.
This situation has resulted in a fall in dollar wages in Pakistan. This is due to the depreciation of the rupee. People working in the service sector are more vulnerable to this trend than those in the manufacturing sector. The depreciation of the dollar has affected exporters and their profit margins in Pakistan.
Inflation in Pakistan is largely dependent on the growth of the money supply. As a result, the economy is experiencing slow growth and a large budget deficit. As a result, the country has only $8 billion in currency reserves and is struggling to avoid a debt and balance of payments crisis. To counter these issues, the government has turned to the IMF for assistance. The IMF loan is expected to unlock an additional $38 billion in loans from other international partners.
Another factor contributing to inflation is the rising dollar rate. Pakistan’s economy depends heavily on imports, and its annual import bill outstrips its export earnings by a wide margin. This shortage of dollars in the local market fuels import-led inflation. According to the latest data released, prices of common consumer items rose by 21.3% in June, primarily because of the price of food and fuel.
The rising dollar rate is one of the major factors driving inflation, which will continue to weigh on the economy. Its high value may devalue the rupee, which will also hurt the overall economic situation in Pakistan. Inflation also lowers the value of domestic money, which in turn will further weaken the rupee’s value against other currencies.
Threat of dollar depletion in Pakistan
The fast depletion of foreign exchange reserves is at the root of the twin deficits that Pakistan is facing – the current account deficit and the trade deficit. The lack of foreign currency inflows has also led to a rise in the country’s debt servicing obligations. Since Pakistan’s coalition government came to power in April 2022, the current account deficit has ballooned to USD 17.4 billion – 4.6 per cent of the economy. This is the result of the growing trade deficit and depleting foreign investment.
In the first nine months of this year, the current account deficit reached USD 13.2 billion. There are also pressing external loan repayments that Pakistan must meet. The country will need financial assistance of between USD 9 billion and $12 billion until June 2022 to avoid further depletion of its foreign currency reserves.
The removal of fuel subsidies will affect up to 80 per cent of the country’s 220 million people. This is a huge problem for the country that has already suffered from double-digit inflation for three years. Inflation is already exceeding the World Bank’s lower middle income level, and at this rate, up to ten million people may be pushed below the poverty line. The government is taking “tough decisions” to ensure the country’s economic stability.
Moreover, the shortage of dollars is affecting the country’s foreign exchange market. Pakistan’s banks have begun offering different exchange rates to cover import payments, making it difficult for importers to meet their needs. As a result, the rupee has fallen by 30% this year alone. The central bank is trying to control the situation by preventing interbank trading. It’s unclear how long it will take for the rupee to regain its previous levels.
There are many ways to increase the supply of dollars in Pakistan. The first and the most obvious way is to increase exports. Exports and remittances will help to increase the supply of dollars. It’s also a good idea to limit imports. Aside from this, a country’s economy must also focus on global competitiveness and investment in research and development.
