Why is PKR falling against the US dollar?

In Blog, Economic Security, National Security
August 4, 2022
Rabia Sohail
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The Pakistani rupee has been facing a fall against the US dollar for many years but a high amount of depreciation of the PKR was seen in the month of July 2022 the Pakistani rupee has depreciated by more than Rs35.13. To this date, the rupee continues to face a decline against the US dollar

The Pakistani rupee has been facing a fall against the US dollar for many years but a high amount of depreciation of the PKR was seen in the month of July 2022 the Pakistani rupee has depreciated by more than Rs35.13. To this date, the rupee continues to face a decline against the US dollar for many reasons and still, the government has failed to find a solution or control the ongoing massive devaluation.

In Pakistan, the continued rise in the price of oil led to the depreciation of the PKR. Since Pakistan is not oil-producing but rather an oil-importing country. The oil is imported in the US dollar which makes the fall in the rupee leading to the high purchase of the dollar in the market. An upsurge in oil price leads to inflation, increases budget deficit, and puts downward pressure on the exchange rate, making imports more expensive. The rising oil prices are a most important worry for all the developing economies and Pakistan is suffering from it too. From August 01, 2022, the government might increase the price of petrol and diesel by Rs10-17 per liter even though prices of petroleum products and crude oil continued just a little lower. The cause for the rise has been estimated upwards just for reason that the huge devaluation in the PKR.

Another factor in decreasing the value of the PKR is high imports. Companies importing supplies like machines, electronics, food & beverages suffer the utmost from Rupee depreciation. This takes place as the value of the Rupee plunges against the US Dollar, and imports become more costly. So the companies importing raw materials, capital-intensive sectors, and foreign borrowings will be harmed the most. Due to this reason on 3^rd May 2022, as announced by the Minister for Information and Broadcasting Marriyum Aurangzeb that the government forbade the import of non-essential and luxury items to stabilize the fast depleting foreign exchange reserves and rising import bill, as part of measures that a minister guaranteed would save $6 billion. There was a slight rise in the value of PKR after the ban imposition on the non-essential and luxury items though the ban was lifted leading to a rising devaluation of the PKR again.

Low exports compared to imports will lead to a rise in the devaluation of the rupee. Pakistan’s imports are 1583193.00 PKR while the exports are 591802.00 PKR. According to this even though in 2022 the exports have increased compared to 2021 still that is not enough for the ongoing PKR devaluation. Meaning that when the country’s exports are more than the imports the country is going to get paid in dollars hence making the high circulation of the dollar in the country. So, due to low exports compare to imports the imports have to first buy $1 by giving Rs239 making the high circulation of the rupee in the market which leads to depreciation of the Pakistan rupee.

More loans from IMF in order to return previous loans will lead to the high circulation of the PKR in the country meaning the circulation of the dollar in the country will more but then again have to convert a huge amount of PKR to return that new and old loan. Such as the current situation shows that 1$= Rs239 meaning that to return the previous loans now Pakistan has to convert PKR Rs239 into $1 compare to the loans taken from IMF in 2021 at that time dollar was RS160 showing more loans in dollar coming the country affecting the local currency as then there will be high circulation of PKR in the foreign exchange.

Political instability is another reason for the falling in the value of the rupee. The chairperson of FAP Mr. Malik Bostan indicated that the decrease in the price of PKR against the dollar is due to political uncertainty which led to the rise of the dollar in the international market. The political uncertainty has created a lot of issues, including the decreasing rate of the Pakistani rupee. Finance Minister Miftah Ismail on 20^th July stated PTI routed out PLMN in the by-elections in Punjab and the import payment took the currency to its new low.

When political parties and democracy become weak, movement becomes weak, too. It is significant that political parties are organized around ideas, causes, and principles, from where strategies, action plans, and concrete implementation follow. If parties and groups just have a list of things they don’t like and want to change nonetheless have a little or no broader foundation of notions, values, and visions, it becomes risky, unsound, and not safe. The current political situation led to a decrease in the dollar when in April 2022 Shehbaz Sharif became the PM after a no-confidence vote and now Chaudhry Pervaiz Elahi becomes the Chief Minister of Punjab after the Supreme Court decision again making political instability in Pakistan. This will lead to high inflation in Pakistan which will lead to a depreciation of the rupee.

With the continuous downfall faced by the Pakistani currency against the US dollar, Pakistan should learn from the example of Sri Lanka regarding the high inflation rate and the devaluation of their currency. If the government of Pakistan does not find any solution regarding its currency depreciation then it will face the same problems which Sri Lanka is facing today.