Pakistani rupee witnessed a massive decline in its value on July 5, 2017. However, during the course of last 15 days, the rupee successfully regained most its value at the market that closed on July 20.
This is, however, not the end of the rupee debacle. Many industry pundits believe that another dive of the rupee is not only inevitable, but is also not too far away. The intensity of this debate is premised on the fact that the country’s current account deficit is widening at an unprecedented rate.
From $4.867 billion in the financial year, 2016, the gap has widened to $12.1 billion in the financial year, 2017. This is why many experts are of the view that, if needed, the SBP will not shy away from letting the rupee to fall.
As discussed above, as of now, the rupee has regained its value. From Rs108 on July 5, the rupee now stands at Rs105. Before we begin analyzing the probable effects of the devaluation of currency on the country’s economy, we need to find out what are the parameters that determined the value of the currency.
In Pakistan, there is no institution that fixes the value of the currency. Here, the value is determined by the market – the demand and supply of the rupee in the market. The country uses the floating rate system to determine the value of the currency.
So what are the impacts of the devaluation of the currency on the financial sector?
When the value of the currency is down, it means that the country will have to pay more local money to import anything from the international market. This means that the imports will become more expensive for the country. On the other hand, when an exporter exports his products, he will get ‘more money’ in exchange of the foreign currency awarded to him. Hence, because of devaluation of money, exports will be encouraged and imports will be discouraged.
Now, let’s look at the situation from the perspective of an importer – the country which is importing our goods. If a country was able to buy 10 units of goods for a price of $1 and after the devaluation of the currency, it is now able to buy 15 units of goods for the same price, the country will prefer importing goods from the country which has lesser value of currency. In this way, the imports of the country will increase.
The unstable balance of payment has also left the country in a fix. Through a surge in exports, it is expected that the BOP will gain some stability. Financial experts of Pakistan have also expressed that the strength of the country’s economy is not determined by the value of its currency only, and that the currency was overvalued for a considerable amount of time.
All things aside, there is one thing that all financial experts and people with eyes on the country’s market should keep in mind. Pakistani history shows that currency devaluation has never uplifted exports for the country. On the contrary, the exports had gained momentum when the rupee was stable. This means that although exporters get benefit when they exchange the foreign currency into local market, the overall impact in terms of dollar – the strongest currency at the moment – remains negligible.
The other sector that might have little effect on the economy is foreign remittances. Money sent by people living abroad will be converted into more local money. As of now, the foreign remittances have declined rapidly and it is hoped that because of devaluation of the currency, the trend of sending money back to the homeland will again gain momentum.