In Bretton Woods System.

1945, a system introduced known as Bretton Woods System.

a. The establishment of IMF (International monetary fund) : Majority of the world
countries are the members of IMF. The share of the country is decided on the basis
of its GDP size. Approx. 35% share is U.S, approx. 35% share is of Europe, more than
75% share is of Global North (US, Europe and Canada and remaining 25% share is of
developing world.
IMF has got 2 major responsibilities.
1. To bail out troubled economy: those countries faced with budget deficit.
2. To Provide loan to the countries faced with Dollar shortage/ crises

b. The establishment of IBRD (International bank for reconstruction and development):

it is a part of World Bank (WB). It provides funds to finance development projects. It
provides funds for social welfare activities (health, education, etc.)
c. The establishment of GATT (General agreement on trade tariffs): it was given the
responsibility to promote free trade. Countries were encouraged to sign bi-literal
trade agreement, FTAs (free trade agreements).
d. All the participants of Bretton Woods agreed that US would prints its dollars against
gold while the rest of the countries print their currency against dollars. Since then,
Dollar has become international banking currency. State banks of world countries
keep their reserves in Dollars.
But since, US moved out of the Bretton Woods system, it stopped printing Dollars against
gold and decided to print to print Dollar against its Good will (the economic potential of
US). Therefore, World countries also started printing their currencies not only against
Dollars but also against other International accepted currencies like Pakistan prints Pkr
against Dollar, Pound, Riyal, Euro, and Yen but practically Dollar is still the major reserve
against which Pakistan and other major countries prints their currency.
 Devaluation of PKR:
Devaluation/ Depreciation of Pkr
Abnormal devaluation of Pkr is taken place in last 2 Decades.
In the year 2000: Dollar vs PKr
1$: 37 PKr
In 2008: 1$: 62 Pkr
In 2013: 1$: 84 Pkr
In 2018: 1 $: 125Pkr
In 2022: 1$: 178 Pkr
In April 2023: 1$: 285 Pkr
Today: 1$: 297 Pkr
Reasons:
1. The decline in the dollar reserves in the country cause depreciation of Pkr
The price of Pkr Is directly linked/ condi’on with availability of dollar
The more the Dollar available, the stable the Pkr would be The
decline in the dollar reserves, the depreciation of Pkr.
In Feb 2022, the total dollar reserves 23 billion dollars in total.
Including; state bank of Pakistan had 15 billion, while commercial banks had 8 billion
dollars

In September 2023: the total reserves of Pakistan have less than 7.7 billion dollars
State bank of Pakistan has 3+ billion while commercial banks have 4+ billion
Means decline in total reserves, and deprecia’on of pkr

2. Shifting of policy from artificial control to free floating currency:

Artificial control: In November 2022, the finance minister and Governor state bank
announced that bank would purchase 1 dollar at max 225pkr not more than that.
Means capping on the price of dollar while the original price of dollar in the private
market (stock exchange, money exchanger), the price in private market varies
between 265 – 275. Whereas state bank capped it on 225pkr. Condition of IMF to
provide loan to Pakistan: make rupee floating.

Floating: the price should be equal to the private market.

In March 2023, in a single day 25 pkr jumped downed / depreciated
In 3 days, rupee depreciated from 225 to 265 Now the price of 1
dollar is 280 PKr.

3. Quantitative easing:
There is an international monetary rule: whenever a state bank of a country prints
more notes than the reserves (Euro, Riyal, Yan, Pound, Dollar). Major the currency is
dependent on Dollars.

In fiscal year 2010-11: almost 521 billion Pkr printed

 In 2013-14: almost 648 billion Pkr printed
Printing is more against the dollar reserves, resulting devaluation of PKr.
Implications:
a. Abnormal increase in inflation
Because of devaluation, unprecedented increase in the price of commodities.
Every imported product got expensive. For example, in June 2021, the cost of 1
billion dollar of import was 178 billion Pkr but now it is more than 280 billion Pkr.
When Oil and gas got expensive, it automatically resulted in the rise of
transportation cost, Electricity prices increase, industrial products got expensive.
More than 48% increase occurred in the prices of products against the previous
years. All those 36 products which comes under the consumer’s basket, all got
expensive (Kitchen products, washroom products, electricity, agriculture,
industrial, fuel etc).

b. Purchasing power parity declined:

Pkr devalued and people purchasing less product. All the salary class has
almost the same salaries or maximum increase occurred by 10-15% on
the other hand the price of product has more than double since last 2
years. Multiple reasons are for this but Major reason is Devaluation of
Pkr.
c. Many Industries got shutdown:
Production cost increases the prices of products. Because the import of
raw material and half-finished goods got expensive, at the same time
electricity also got expensive so as of the transportation cost that. Has
resultant in the increase of the price of industrial goods. The products of
Pakistan could not compete with the products of Bangladesh and India, it
resulted in shutdown in more than 200 industrial units. For example,
indus, honda, Suzuki (automobile), textile industries like Koh e noor,
nishad, lawrancepur closed down.

b. Increase in the volume of foreign loan:

Foreign loan has been taken in terms of dollars and it has to paid in terms of
dollars. Dollar is to be purchased from market in Pkr and then have to pay to
external sources. As rupee devalued against Dollar, volume of foreign loan has
increased without taking a single more penny.
In Jan 2022: 178 billion Pkr were required to buy 1 billion dollars
In April 2023: 285 billion pkr were required to purchase 1 billion dollars
Economic division: June 2023, 54.3 trillion Pkr loan on Pakistan (both internal and external
loan), In June 2021, the total volume was 38 trillion Pkr. More than 16 trillion increases in 1
year. Approximately 4 trillion increases because of devaluaKon of Pkr.

Solu’ons:
1. Bring Dollars to the country
 Acquire loan, increase in remittances, increase in tourism, increase in foreign
investment. Long term solution is increase in exports would result in more dollar
earnings.

2. Decrease pressure on Dollars reserves

Shift portion of trade other than dollars like
China Pakistan trade to be conducted in yuan vs Pkr.
Pakistan Afghan trade in Pkr
Pak has started purchasing oil from Russia in Yuan.
Pak Iran Trade in Pkr
3. Political stability
Political stability results in economic stability. Investors invests in Local market due to
political stability and peace, sustainable economic goals. Economy would grow,
increase export, more dollars enter into the country
4. Control the dollar smuggling:
Dollar smuggling has been done to Afghanistan and Iran.
 Next Topic: Loan
In the year June 2023, (economic division: 54+ trillion Pkr. loans on Pakistan) Foreign
loan is approx. 140 billion dollars.
State bank of Pakistan (SBP) reported; • Total
loan in 2021 is 38 trillion Pkr. Foreign loan is
around 125 billion dollars
• In 2018, it was approx. 30 trillion Pkr Foreign
loan is nearly. 105 billion dollars
• In 2013, loan is around 12 trillion pkr
Foreign loan is around 84 billion dollars
• In 2008, loan is around 6 trillion Pkr Foreign
loan is around 63 billion dollars

Reasons of Acquiring loan:

1. To meet the budget deficit, government acquire loans
In the fiscal year 2022-23, the total budget deficit was 4.3 trillion Pkr.
In the fiscal year 2021-22, the total budget deficit was 4.1 trillion Pkr.
In 2020-21, the total budget deficit was 4 trillion Pkr.
In 2019-20, the total budget deficit was 3.8 trillion Pkr.
In the last 10 fiscal year, the budget deficit remained above 3 trillion Pkr. Means
expenditure is more and collec’on is less.

2. To support/ stabilize dollar reserves

In the fiscal year 2021-22, current account deficit was more than 12 billion dollars
shorlall Trade deficit is about 44 billion dollars. 13 billion dollars loan was paid.
Total oullux was 57 billion dollars. 31 billion arrived as remitt0ances. other sources
of influx are about 14 billion dollars. Total shorlall remaining 12 billion dollars to
meet the short fall, loan acquired.
In the fiscal year 2022-23, the shorlall is about 18 billion dollars to meet the short
fall, loan acquired.

3. Loan has been taken to finance developmental products

Majority of CPEC projects are loan based; road projects, railway projects are all loan
based, Dasu Dam and Mumand Dam, dimer basha dam is also loan based projects.

Implication of loan:
1. Pakistan is stuck in a debt trap:
State is stuck in the vicious circle of loan, to pay off the loan the government has to
acquire more loan. In the last four fiscal year, 36 dollars loan has been taken and 27
billion has been paid. In 2021-2022, 13 billion was paid off, acquire loan almost 12
billion. Every government after coming into power either 2008, 2013, 2018 and 2022,
the first and the foremost step been taken is to acquire loan.
 2. Terms and condi’ons of loan: every package of loan given by IMF or ADB or WB or
any other lender is accompanied by a long list of condi’onali’es. In Oct 2022 and
March 2023, IMF package accompanied by long terms and condi’ons including
Pakistan has to increase the price of petrol and diesel as well as electricity,
Devalua’on of Pkr.
Government has to take Sovereign decision but failed which increases infla’on.

Solu’ons:
1. Acquire more loans: 20-25 billion Dollars loan required to have breathing space to
bring new reforms.
2. Tax reforms
3. Industrial reforms
4. Agricultural reforms
5. Increase in tourism
6. Encourage foreign investment