The recent devaluation of Pakistani rupee should have raised many alarms in the country for it being the biggest factor in indicating the upcoming inflation and economic downfall. Little or no attention has, however, been paid to this issue by the Government of Pakistan. One of the major reasons behind the devaluation of currency is the money printing frenzy that the government has gone in to. The more money the government prints, the more devalued the currency becomes.
Printing money is a major cause of inflation in any country as it increases the general price level. Previously, countries would only print paper money in accordance with the gold reserves they had. Which meant that countries would print the money which they can back with their gold reserves, thereby keeping the inflation in control.
This mechanism bounds the government to only spend the money it has rather than spending the money it does not have. But things changed in 1971, when the US President, Richard Nixon abolished this rule so that the government can spend any amount it wants by printing the money. Things started to change slowly and gradually, and now Pakistan relies heavily on printing money to support its expenditures.
This year, only in March-April, Pakistan government printed Rs. 127 billion of currency notes with Rs. 89.18 billion printed in the first week of April only. The increase in currency printing is expected to bring a surge in inflation, as expenditures are being covered by the government with the use of newly printed money.
The easy financing of printing new currency notes means that the assets have not increased which can cover the money supply in order to cut down the general price level. The increase in money supply increased the general prices of products which had an impact on the purchasing power of the consumers.
Salaries and wages of people have not increased at the same rate at which inflation has gone high. Due to this reason, living standard of the people has not yet improved and continues to go from bad to worse. Back in 1950s, 10 gram gold in Pakistan was valued at Rs. 50-60 which has now gone up to more than Rs. 40,000.
While the value of gold has monumentally since then, the comparative increase in wages is not seen anywhere, causing an increase in the overall inflation over the years. In order to curb the money supply, State Bank of Pakistan already has a Cash Reserve Requirement (CRR) for banks who have to maintain balance of 5% of deposits on weekly basis.
The central bank also keeps track of the interest rates being offered by the banks as lower interest rates will attract more borrowers so that the money supply will be in circulation. It’s the duty of State Bank to ensure that currency printing is reduced or else the upcoming generation will be poorer than the current one.