Devaluation of PKR:

Devaluation/ Depreciation of Pkr

Devaluation of Pkr:
Pakistan Rupee has abnormally devalued against dollar in the last two decades.
In the year 2000 it was 37 Pkr against 1 $

In the year 2008 (30 june) 62 Pkr against 1$

Year 2013 – 84 Pkr against 1 $
Year 2018 – 125Pkr against 1 $
Year 2021 – 178 Pkr against 1 $
June 2023 – it was 280 against 1 $
Reason of devaluation of Rupee:
Reasons:
1. The decline in the dollar reserves in the country cause depreciation of Pkr
From 1945, since bretton wood system was implemented, since then dollar is an
international currency. Majority of the world countries printed their currencies
against dollars. Resultantly their state bank reserves and state bank reserves are not
only in the forem of gold but mainly in dollars. The price of the currency of a
particulary currency decide against dollar reserves.

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 June 2021, 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 June 2023: the total reserves of Pakistan have less than 7 billion dollars
State bank of Pakistan has 3 billion while commercial banks have 4 billion
Means decline occurs because of trade deficit which was 44 Billion $ in FY 2022-23.
Secondly 13 Billion $ pulled out because of debt servicing or repayment of loan with
intrest. Thirdly, dollar smuggling dangerously increased mostly to afghanistan to
Iran. Fourthly dollar was withhold by local investor.

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

There are two major patterns are for deciding the price of the currency. First is
state control. ( where the price of currency is decided by the state) this happens in
communist economies or close market economies example N- Korea, Russia etc.
Second type is market control means the price is decided by the market forces not
by the state,but on the basis of demand and supply phenomena. This happens in
capalist economy or open market economy.
Thirdly, there is a phenomena in between the two that is called artificial control.
The state doesnot dorectly control the price nor does it announce the control.
 Rather it indirectly directs banks and registered money exchangers or forex to
decide the price of the currency.

Artificial control: In November 2022, the finance minister and Governor state bank
directed the commercial banks to CAP dollar (fix price of dollar). Bank announced
to purchase or sell dollar at maximum 225 Pkr. This price was not the original price
as the price of dollar in the private market (stock exchange, money exchanger)
was above 265+ Pkr. Whereas state bank capped it on 225pkr.

Condition of IMF to provide loan to Pakistan: make rupee floating.

IMF conditioned its loan with making Pkr free 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.
The most important products of Pakistan are oil, gas and coal. In 2022-23,
Pakistan imported more than 23 Billion $ of hydrocarbons. 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 4.7 trillion increases because of devaluaKon of Pkr.

Solutions:
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. 29 trillion Pkr
Foreign loan is nearly. 107 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. The total
collection left with the center excluding the provincial share is 4.1 trillion Pkr while
the expenditure was 8.4 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 3.5+ trillion Pkr.
Means expenditure is more and collec’on is less.

2. To support/ stabilize dollar reserves

One of the major reason is support the depleting dollar reserves. Dollar reserves are
being kept in the current account or the foreign account.
In the fiscal year 2022-23, current account deficit was more than 18 billion dollars,
Trade deficit is about 44 billion dollars, 13 billion dollars pulledout because of
repayment of loan. Total outflux was 57 billion dollars. 29 billion arrived as
remittances, 4 billion dollar arrived in Roshan Digital Account. The dollar shortage
reduced to 24 billion dollars. 6 Billion dollars arrived in other sources like foreign
investment, issuance of bonds etc. but the total shortfall remaining was 18 billion
dollars. To meet the short fall, loan acquired.
In the fiscal year 2022-23, the shortfall 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 2023-24, the government has suppost to pay 18 billion dollars,
it doesnot have any other option other than acquire loan. In the last four fiscal year,
36 Billion dollars loan has been paid off. In the upcoming 3 Financial years Pakistan
has to pay 74 Billion Dollars. To pay off this loan the governemnt has to acquire
more loans. Every government after coming into power either 2008, 2013, 2018 and
2022,and 2024 the first and the foremost step been taken is to acquire loan.

2. Terms and conditions of loan: Loan is always accompanied by a long list of

conditionalities. Every package of loan given by IMF or ADB or WB or any other
lender is accompanied by a long list of conditonalities. The first and major condition
is to remove subsidies. In Oct 2022 and March 2023, IMF package accompanied by
long terms and conditions including removal of subsidies on petrol, diesel and
electricity Resultantly increase in the price of petrol and diesel as well as electricity,
more than double. Second condition was to make rupee free floating. When the
governement make rupee free floating, the rupee devalued from 225 to 265 within 3
days. Government has to take Sovereign decision but failed which increases
inflation.

Solutions:
1. Acquire more loans: not acquiring loan is not the option, government has to acquire
loan and it has to acquire more or bigger volume of loan, it should try to get soft
loans having easier terms and conditions like lesser intrest and longer maturity time.
2. Tax reforms
3. Industrial reforms
4. Agricultural reforms
5. Increase in tourism
6. Encourage foreign investment

Inflation:

As per PBS, Annual report 2023 Pakistan faced higher ever price hike since independence,
the sensitive price index was 49.8% in March while consumer index was 37% in July, 2023.

Applications: The highest price hike was noted in Hydrocarbon. The per liter prices of diesel
& petrol got more than double in the last two years. The prices of LNG, LPG and domestic
gas was increased by more than 150% in the last two years. The per unit prices of electricity
has jumped by more than three times. The domestic unit that was 17 PKR two years back is
now more than 54 PKR.

The prices of edibles exponentially increased. The price of edible oil increased by more than
160%, flour by more than 100%, sugar by more than 150%, pulses by more than 80%, rice by
more than 100%, the prices of fruits have also got more than double whether mangoes,
Apple, watermelon, tomatoes and other commodities. The same has been the case with
vegetables whether onion, potato, etc. which got increased more than 300% specifically
onion.

The transportation cost has tremendously increased, shipment charges have increased by
more than 150% in the last two years whether it is ships, trains, Airlines or local transport
Even the cost of private transport has equally increased.

Reasons:

1. Devaluation of PKR resulted in higher inflation: The price of PKR against dollar in
June, 2021 was 178 PKR against One Dollar. March 2024 it is 280 PKR against One
Dollar. Pakistan is primarily import-based economy. Every imported product is
purchase in Dollars and it is sold in the PKR in the local markets and Rupee got
devalued against dollar that caused higher inflation. If the import of One Billion
Dollar Oil had a cost of 178 billion PKR in June, 2021 it is now more than 280 billion
PKR.
2. The Conditionalities of IMF Caused inflation: The 2022 & 2023, IMF package was
accompanied by long list of conditionalities which consisted of numerous Dos &
Don’ts like removal of subsidies on electricity bearing 200 billion PKR. Secondly,
removal of Subsidies on Gas which was more the 70 billion PKR. Thirdly, removal of
subsidies on Diesel & Petrol. This caused the price hike of all fuel-based products.
Fuel is the major determinant of the prices of other commodities whether transport,
electricity, industrial products and Agricultural products, etc., Secondly, IMF
conditioned its loan with the devaluation of PKR. IMF demanded that the price of
PKR is overvalued it must be made competitive to the market price which resulted in
March, 2023 the price hike of Rupee devalued from 225 to 275 against one dollar.
This caused further inflation.
3. The International Price Hike Caused Inflation in Pakistan: The prices of commodities
jumped in the International-market in the last three years. Primarily because of post-
covid market resumption and the increase in demand resulted in the price hike and
supply, production sector didn’t meet the demand. Secondly, the War in Ukraine
resulted in the price hike of Oil and Gas that caused the price hike of every
commodity. Pakistan is a major importer of Hydrocarbon. In FY 2022-23 Pakistan
imported hydrocarbons amounting more 23 billion Dollars. Its price already jumped
in the international market. Pakistan had to import expensive Oil & Coal
4. Political Instability Caused Higher Price Hike in Pakistan: Successful Vote of

No Confidence against the PM and his party on one hand and the dissolution of Provincial
assemblies of Punjab and KPK caused Political turmoil in Pakistan. On one hand the ousted
party adopted the politics of populism and protest while on the other hand State’s excessive
use of force against the populist party. This political instability resulted into the severe
economic crisis in Pakistan. Foreign investors pulled out their investments from Pakistan,
The Dollar trading in PSX declined, Smuggling of Dollars. All these factors caused the
shortage of Dollars in country that resulted in the Devaluation of PKR. The price of PKR
historically conditioned with the availability of Dollars in the market. Shrinking in reserves
of Dollars due to the majority of countries have their national currencies is conditioned
against dollars, maximum reserves of dollars mean maximum economic stability.
Solutions:

1. Bring dollars to the country by acquiring more loans, increase in remittances, increase
in foreign investments and more importantly by increasing exports.
2. Control the outflux of dollar by putting more restrictions on the import of luxury
goods, shift a portion of trade from a dollar to other currencies like Pakistan has
started purchasing Russian oil in Yuan (Chinese currency) and control the smugglings
of dollars. These two steps will stabilize the dollar reserves which would ultimately in
the stability of PKR.
3. Political stability is inevitable for the economic stability in the country.