As we all know about the tragic fall in the value of the Pakistani rupee. This incident happened in February 2023, when PKR dropped 9.5% against the US dollar and its value was declared at 255.4 against the Dollar by the central bank as it lost Rs.24.54. PKR is now standing at 271.24 against 1 US dollar. It has been reported as the biggest fall in the value of PKR since 1999.
Some people might confuse the devaluation of PKR with depreciation. Both, the terms mean the same thing, when a currency loses its value against another one but depreciation happens when a currency loses its worth against another currency because of supply and demand in a free foreign exchange market while devaluation occurs when a government lets its currency fall down for some preplanned purpose.
IMF had given a $6 billion loan to Pakistan in 2019 and it was topped up by another $1 billion at the time of the floods crisis in 2022 but the disbursement was suspended by the IMF in November due to Pakistan’s failure to make progress regarding fiscal deficit because of all the political drama. Pakistan is currently facing an acute balance of payments crisis, with three weeks’ worth of import cover in foreign exchange reserves, which drastically fell from $923 million to $3.68 billion in the new data.
Pakistan was desperately looking for foreign finance and IMF had put some conditions on the table, apart from which was the one of letting the currency decide its worth naturally against the US dollar. This free float model has let the Pakistani currency fall down and our market sources have confirmed that now the PKR will be at the mercy of the market forces. Now, neither the SBP nor the exchange companies will be able to direct its movement against the US dollar.
Pakistan had to agree with the IMF’s conditions because they needed the stalled project to work again. The forex reserves of the State bank of Pakistan were $16.608 billion at the start of February 2022 but it has drastically declined because of heavy external debts and import financing. With this new tactic, Pakistan is hoping to get financial aid from IMF and other allies as well.
This devaluation of PKR can have lots of consequences on Pakistan’s economy, both negative and positive. It cannot be said for certain for whom the devaluation might prove to be beneficial and for whom it will bring lots of potential challenges. We have mentioned most of the consequences that Pakistan might face in the days to come.
Let’s start by describing the potential challenges that Pakistan might have to face one by one:
- Inflation: Inflation in Pakistan according to Trading Economics was 27% as of January 2023 and CPI was at 202.53 points at the same time which is the highest in history as compared to 31.12% in 2001. Pakistan bureau of statistics (PBS) stated that food inflation in Pakistan has risen by 42.9% every year and in the last month only, it increased by 5%. The devaluation of PKR will lead to an increase in the cost of imported goods which in turn will make it hard for the public to afford just the basic necessities as their purchasing power will decline. In some areas of Pakistan a sack of flour today costs Rs.3,000 and all the violence and struggle of the general public can be seen clearly in videos on social media to obtain just one bag of flour. Last month the petrol prices spiked by Rs.35 and now it’s standing at 249.80 per liter. This devaluation will further increase the cost of imported crude oil which will lead to an increase in the price of petrol. Currency exchange losses will make the oil companies sell gasoline and petrol to consumers in the form of higher prices.
- Lower Purchasing Power: The devaluation of PKR will lead to an increase in import costs which in turn will lead to a decline in the purchasing ability of the public. This will make purchasing a hurdle for a lot of people as they will now have to pay more currency units for the same amount of goods and services. The devaluation of PKR might cause unemployment in the country at a mass level which will make it hard for the public to maintain a standard lifestyle. In 2018, according to Data Bank, there were 46.5 million people on the poverty line which increased because of the unfortunate break out of the COVID-19 pandemic. Recently, the country was suffering from the hurdles caused by the 2022 floods because millions of people lost their homes and the economy was on the brink of collapse. So, this devaluation might prove to be a cherry on top.
- Uncertainty: When a currency gets devalued, it creates great uncertainty in the market, leading to a decrease in business and consumer confidence. This uncertainty causes the FDI (foreign direct investment) to reduce drastically because people feel ambiguous about investing in such a risky market. In 2020 Pakistan’s FDI was $2.1 billion according to Macrotrends. According to SBP the FDI in Pakistan’s current fiscal year fell significantly to $253 million as compared to the first quarter of the last fiscal year when it was $479 million dollars. Now, at the time of this devaluation, no one can predict what Pakistan is going to face in the coming days in regard to foreign direct investments.
- The downside of floating exchange rate: The downside of floating exchange rates is that when transitioning from one balance to another, the value of a currency can become extremely volatile and unstable, particularly when significant amounts of money flow into or out of a nation due to speculation by investors. This volatility results in tangible economic consequences. To control this, many developing economies have adopted a hybrid approach, loosely linking their exchange rate to either the US dollar or a collection of currencies.
Countries might consider the free float model for their benefit as well, and let the currencies get devalued. There is always a preplanned strategy on its back that helps the nations to accomplish their desired goals. Following are some of the benefits that Pakistan will derive from this devaluation.
- IMF loan: Pakistan had a considerable amount of loan to pay, borrowed in 2019 and followed by $1 billion in 2022. Pakistan’s government removed the cap for a specific reason. IMF put forward terms for getting the stalled project turned back on. In these terms, IMF urged on free float model. The Pakistani rupee has lost its value considerably to the US dollar because IMF will help Pakistan financially in this time of hurdles. Pakistan may get the bailout and get its economy going in the right direction.
- Increase in exports: As a result of the Pakistani Rupee’s (PKR) devaluation, the country’s exports could rise as overseas consumers find Pakistani items more affordable. The demand for Pakistani exports, including commodities for sports and agriculture, may increase as a result.
- Increase in tourism: Pakistan’s tourism was growing by leaps and bounds in the last few years but because of the COVID-19 the tourism industry was hugely affected. After that Pakistan had to face terrible floods and tourist spots got destroyed which impacted the economy badly. It made Pakistan get even more loans and had to go under the suspension of funding by the IMF. Now, that the PKR has gone down, it will be quite easier for foreign people to afford a lavishing lifestyle here in Pakistan because their currencies will be way more in value as compared to the Pakistani rupee. This may lead to an increase in tourism for Pakistan which will help in supporting the country’s economy to a great extent.
The sudden slump of the Pakistani Rupee against the US dollar has put Pakistan in a difficult position. While the devaluation may help the country to meet some of the conditions set by the IMF and other financial aid providers, it will also have several potential challenges. These include an increase in inflation, a lower purchasing power for the public, greater uncertainty, and the downside of a floating exchange rate. The government will need to take immediate and effective measures to address these issues, stabilize the economy and restore confidence in the market. Failure to do so could have serious implications for Pakistan’s long-term economic development.