In the complex world of finance, there are many aspects that need to be considered to comprehend the intricate problem of foreign exchange, which has an impact on the value of currencies in different countries. Understanding Pakistan's open market currency rates in depth is essential for both private individuals and businesses wishing to invest in foreign currencies. This article aims to provide a comprehensive overview of Pakistan's open market currency rates and the factors influencing them.
The exchange rate of a country's currency, particularly if it is a
developing one, is one of the most crucial measures of the health of its economy.
The economy of Pakistan is reliant on imports. The Pakistani Rupee
(PKR)'s value relative to other major currencies in Pakistan is heavily
influenced by open market exchange rates.
In this article, we will take a closer look at the open market currency rates in Pakistan and how they are determined. We will also discuss the factors that can affect these rates and the impact they have on the Pakistani economy.
The Importance of Open Market Currency Rates in Pakistan
Open market currency rates refer to the exchange rates of different
currencies in a free market (the exchange rate is the price of one currency with
respect to another currency) where the value of one currency is determined through
the forces of demand & supply, as opposed to a controlled or fixed rate set
by the government. In Pakistan, the open market currency rates are updated daily and are used as a benchmark for the value of different currencies.
The importance of open market currency rates lies in their ability
to provide an accurate representation of the demand and supply of different
currencies. They are also used to determine the exchange rates for cross-border
transactions, such as imports and exports, foreign investments, and
remittances.
The open market currency rate is the rate at which a country's
currency is exchanged for another currency on the open market. In Pakistan, the
open market currency rate is determined by supply and demand for different
currencies. The rate can fluctuate daily and is influenced by several factors.
Factors that Affect Open Market Currency Rates
There are several factors that can affect the open market currency
rates in Pakistan. Some of the most significant factors include:
Interest rates: Higher
interest rates tend to attract foreign investment, which can increase the
demand for a country's currency and lead to an appreciation of its value.
However, this is more applicable to advanced economies like the United States of
America where firms, people, and even different governments invest in US
treasury bills, however, developing low-income countries like Pakistan has no
attraction for foreigners to invest in Pakistani T-Bills.
Political stability: Political
stability can attract foreign investment and boost a country's economy, leading
to an appreciation of its currency. Yes, it is a very crucial factor as investors
require peace and stability to do their business, this is one of the main hindrances
in attracting foreigners to take long-term investment ventures in Pakistan.
Trade balance: Because there
is more demand for that country's currency to pay for its exports, a country
with a trade surplus (meaning higher exports than imports) will often have a
stronger currency. This factor has numerous empirical examples, most recently
China's recent economic growth is attributable to an export-led economy.
Inflation: A nation's currency may lose value because of high inflation,
as inflation is like a tax on money, and no one likes to pay unnecessary taxes.
For the nation, it has two negative effects: on the one hand, company costs
rise, and on the other, increased prices make things less affordable for the public.
Impact of Open Market Currency Rates on the Pakistani Economy
The open market currency rate can have a significant impact on the
Pakistani economy. A strong currency can make Pakistani exports more expensive,
which can negatively impact the country's export-dependent industries. On the
other hand, a weaker currency can make Pakistani imports more expensive, which
can lead to higher inflation and negatively impact the country's consumers.
Overall, the open market currency rates in Pakistan are a complex
and dynamic indicator of the country's economic health. It is important for
businesses, investors, and policymakers to closely monitor the rate and its
underlying factors in order to make informed decisions.
How the Exchange Rate is related to overall Economic Health.
It is clear that the exchange rate is ineffective in improving the
trade balance based on the evidence from past studies and from empirical
evidence. Additionally, we have noted that the Pakistani economy is being
burdened by an increase in external debt because of currency depreciation. It has been noted that the entire
volume of commerce between Pakistan and its partners is more than the
burden of debt rises caused by depreciation.
Trade Balance in 2020
Here is the data on major trade deficits with Pakistan’s trading partners.
A significant deficit arises in Pakistan’s balance of trade due
to heavy imports from China, UAE, Indonesia, Saudi Arabia, Qatar, Malaysia,
Japan, and Korea, and as a result of which Pakistan has a trade deficit with these
countries.
Whereas Pakistan's highest export demand comes from USA & European countries and resultantly Pakistan has a trade surplus with these countries.
Positive and Negative effects of Open Market Currency Rates
The exchange rate of a currency is the price of one currency against
the price of another currency and the price is determined by the demand for that
currency in the foreign exchange market. Exports represent the demand for local
currency in the forex market and imports as the demand for foreign currency in the local market. Therefore, in an open market, exchange rates are determined by
the forces of supply and demand. In Pakistan, an open market exchange rate
system was introduced in the 1980s and has since had a significant impact on
the economy.
Positive Effects:
Increased competitiveness: A
flexible exchange rate system makes exports more competitive, leading to an
increase in exports and a boost in economic growth.
The attraction of foreign investment: A stable exchange rate attracts foreign investment, which can
provide capital and technology to spur economic growth.
Stabilization of inflation: A
flexible exchange rate can help stabilize inflation by reducing the cost of
imported goods, which make up a significant portion of the country's
consumption basket.
Negative Effects:
Volatility: Open market
exchange rates are subject to rapid and frequent fluctuations, which can lead
to instability in the economy.
Balance of payments: Rapid
fluctuations in the exchange rate can lead to imbalances in the balance of
payments, which can lead to a shortage of foreign currency and a decrease in
the country's international reserves.
Inflation: Fluctuations
in the exchange rate can lead to inflation by increasing the cost of imported
goods, which can result in a rise in prices for consumers.
Overall, Pakistan's open market currency rates system has hurt the
country's economy by increasing inflation due to higher import prices and, more
importantly, by having a severely negative impact on the national budget
without the requirement for borrowing. For instance, if a country owes $120
billion in debt and is required to pay back $10 billion annually, and further
assume that the exchange rate increases from 50 to 55 per USD, this country's
liability will increase suddenly from 6,000 to 6,600 (in local currency, or
LC), requiring LC 550 instead of LC 500, which must be recovered from taxpayers
through direct or indirect taxes. However, with effective policies and
management, its positive effects can be maximized while minimizing its negative
effects.
The idea of Open Market Currency Rates and their implementation
The balance of trade is managed using the exchange rate as a policy
variable. According to the well-known J curve hypothesis, local currency
depreciation will make foreign goods more expensive for residents and domestic
goods less expensive for foreigners. As a result, imports will drop and exports
will rise, improving the trade balance. However, neither this investigation nor
numerous preceding ones discovered any proof of the J curve's existence for
Pakistani trade data. Only if imports and exports are sufficiently elastic to
the fluctuation of the exchange rate will the J curve theory hold true. Most of Pakistan's imports are essentials, and they are unaffected by
changes in the exchange rate. Therefore, the value of imports will grow due to
the currency depreciation, and the amount of external debt measured in local
currency would also increase. The country's economy will be heavily burdened by
the devaluation of the currency given the size of the external debt that must
be paid. Therefore, the overall impact of currency depreciation is an increase
in both debt levels and import costs.
The Historical Performance of the Pakistani Rupee
The Pakistani Rupee has historically faced fluctuations and
devaluation due to a combination of factors such as political instability, the balance of payment deficits, and inflation. The devaluation of the Rupee has
been a common phenomenon in the country's history and has resulted in a
significant decrease in its value.
The open market currency rates have a significant impact on the
exchange rate of the Rupee. When demand for foreign currencies such as the US
Dollar increases in the open market, it leads to an appreciation of those
currencies and a corresponding depreciation of the Rupee. Conversely, a
decrease in demand for foreign currencies results in a devaluation of those
currencies and an appreciation of the Rupee.
The government of Pakistan has intervened in the past to stabilize
the value of the Rupee through measures such as imposing restrictions on
currency trading and buying/selling of foreign currency. However, these
interventions have not always been successful in preventing devaluation and
have sometimes resulted in a shortage of foreign currency, leading to
difficulties for importers and foreign investors.
In conclusion, the value of the Pakistani Rupee has been
historically affected by a combination of factors, including open market
currency rates, political instability, and inflation. It is important for the
government to maintain stability in the currency markets to encourage
investment and boost the country's economy.
The Historical Performance of the Pakistani Rupee
Year 1$/PKR
2013-01-30 97.610082
2014-01-30 105.499909
2015-01-30 101.082209
2016-01-30 104.732526
2017-01-30 104.732526
2018-01-30 110.716714
2019-01-30 139.711435
2020-01-30 160.108501
2021-01-30 160.108501
2022-01-30 176.714719
2023-01-30 260.203921
Information from 2013 through 2023 showing the historical exchange
rate between the US dollar (USD) and Pakistani rupee (PKR). It shows a
long-term trend of the USD strengthening relative to the PKR, with the rate of
exchange rising dramatically from 2022 to 2023. It's important to remember that
a number of variables, such as macroeconomic conditions like low exports and
low foreign exchange reserves coupled with high debt servicing, government
tactics used to delay the IMF program, and global events like the increase in oil
prices as a result of the conflict between Russia and Ukraine, are some of the
main determinants of worsening open market currency rates.
Conclusion
In conclusion, the open market currency rates in Pakistan do not
yield positive results in boosting exports and decreasing the volume of
imports. The major reason for this situation is that Pakistani exports are not
price sensitive, i.e., demand for Pakistani exportable goods does not increase
due decline in price (here price is PKR with respect to other currencies).
Understanding these dynamics is crucial for businesses, investors, and
policymakers to make informed decisions and navigate the Pakistani economy.
Pakistan's trade balance has been remained consistently negative throughout
its history of Pakistan, with imports outpacing exports as a result of which
PKR continues to depreciate. The country has implemented various exchange rate
policies in an attempt to address this imbalance, but they have had limited
success in reducing the trade deficit, rather than being unable to yield positive
results. The government's continued focus on stabilizing the economy and
improving the trade balance remains a crucial challenge and addressing the root
causes such as competitiveness and diversifying exports will be key to
long-term success.
The solution to the Issue
The challenge of balancing a nation's payments can be difficult and
call for multifaceted strategies. The following are some potential remedies
to Pakistan's balance of payment problems:
Encourage Exports: By increasing
exports, Pakistan can earn more foreign exchange and will be able to reduce its
balance of trade issues. Pakistan has diversified its exports which are at
present predominately at present rely on cotton and allied industry.
Import control: By limiting
imports, a country can reduce its need for foreign exchange and improve its
balance of payments. Imports of non-essential goods and services must be
discouraged.
Increasing foreign direct investment (FDI): It can aid the country's much-needed balance of payments
requirements by creating an atmosphere that is conducive to investors and by
improving the country's educational system to develop knowledgeable, competent
people for potential investors.
Promote tourism: By drawing more
visitors, the nation can increase its foreign exchange earnings and potentially
resolve its balance of payments issues. However, a tolerant and peaceful
Pakistan is necessary for this.
Monetary and Fiscal Policies: The
government can employ monetary and fiscal policies to manage the economy and control inflation. This will
lower the cost of doing business and have a beneficial influence on the balance
of payments by lowering interest rates & inflation.
Economic diversification can benefit a country's balance of
payments by reducing its reliance on a limited number of exportable goods like
textiles, cotton, and related industries.
These are merely a few potential solutions to Pakistan's balance of
payment problems; when formulating a precise course of action, it is crucial to
take into account the particular circumstances and limitations of each nation.
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