Pakistani Rupees is the most devalued currency in the South Asian region, even war-torn Afghan currency is more valued than PKR and has a powerful value as compared to USD. With inflation, devalued currency, price hikes in petroleum products, and electricity bills, natives have started to leave the country on a massive scale. Thousands of people are leaving Pakistan every month.
Currency devaluation can be caused by various factors, and it is often a combination of several elements. For Pakistan, some common reasons for the devaluation of the Pakistani Rupee (PKR) include trade imbalance, current account deficit, inflation, political and economic instability, foreign debt, negative forex market speculations, global economic factors, and indeed State Bank of Pakistan policies.
Besides the continuous claims and effects of the public and private sectors, Pakistan consistently imports more than it exports, which leads to a trade imbalance. The increased demand for foreign currencies (to pay for imports, usually the US Dollar) put pressure on the exchange rate, causing the local currency to devalue. A persistent current account deficit, where a country spends more on foreign trade and payments than it earns, also weakens the currency. This deficit often necessitates borrowing in foreign currencies, putting pressure on the exchange rate.
High inflation rates also create doubts about the value of a currency in any country. The inflation rate in Pakistan is significantly higher than that of its trading partners, which results in a decrease in the real value of the PKR.
Investors are sensitive to political and economic stability. If there is uncertainty or instability in the country, foreign investors withdraw their funds, leading to a decrease in demand for the local currency and a subsequent devaluation. Unfortunately, Pakistan is also lagging behind in this sector. Circular and foreign debt is increasing day by day; poor governance is adding fuel to the fire, ambiguities associated with fresh elections and upcoming political governments are also damaging the democratic, societal, and economic fabric of the country.
If a country has a high level of foreign debt, especially denominated in foreign currencies, it can lead to increased demand for those currencies, putting pressure on the local currency. The same is happening in the case of Pakistan. Pakistan’s crumbling economy bears the weight of substantial debt acquired from global entities and nations such as China, the EU, ADB, and the IMF. The amount needed to be repaid to France by Pakistan is USD 2.85 million, to China $2.44 billion, and to Japan, it is USD 4.57 million. In addition to settling debts with various countries, Pakistan has to repay the International Monetary Fund (IMF) a total of USD 189.67 million. This comprises the principal sum of USD 165.02 million and an additional USD 24.65 million in markup.
Pakistan is facing multiple repayments, including $56.9 million to the Asian Development Bank, $72.06 million to the International Development Association (IDA) of the World Bank, and $8.82 million to the International Bank for Reconstruction and Development (IBRD). Additional minor repayments are also allocated to the International Fund for Agricultural Development (IFAD) and other donors.
Forex markets are influenced by speculation. If there is a perception in the market that the PKR is likely to depreciate, it can lead to increased selling of the currency, contributing to devaluation. Events or trends in the global economy also impact a country’s currency. For example, changes in commodity prices, global economic downturns, or shifts in investor sentiment affect the value of the PKR.
Monetary policies, interest rates, and interventions by the central bank (State Bank of Pakistan) influence the exchange rate of local currency. If the central bank is unable to effectively manage these factors, it can contribute to currency devaluation.
It is essential to note that these factors are interconnected, and a combination of them often contributes to currency movements. The specific circumstances and policies at a given time influence the extent to which these factors impact the devaluation of the Pakistani Rupee.
A recent report highlights Pakistan’s unique position in Asia, projecting it to stand as an outlier with the highest predicted inflation rate. Despite this, the country is anticipated to have the fourth lowest economic growth rate among the 46 economies in the region.
The Asian Development Outlook, the primary publication of the Asian Development Bank (ADB), has made a slight downward adjustment to the economic growth forecast, now at 1.9%, while significantly elevating the inflation projection to 25% for the ongoing fiscal year in Pakistan. The report foresees potential rises in interest rates and advocates for a fiscal consolidation plan that involves restricted expenditure on defense and energy subsidies. Furthermore, it highlights that while currencies in other developing Asian economies have experienced slight depreciation, Pakistan’s currency has undergone a substantial devaluation of 30%. In contrast to its regional counterparts, Pakistan has observed a decrease in foreign remittances. The ADB emphasizes the existence of exceptionally high downside risks to Pakistan’s economic outlook.
Previously, Pakistan’s economic prospects were relatively unfavorable only within the South Asia region, but ongoing economic deterioration has positioned the country toward the lower end of the Asian spectrum.
The ADB cautions that the economic outlook faces exceptionally high downside risks. Factors such as tighter global financial conditions and the potential for supply chain disruptions resulting from an escalation in the Russia-Ukraine conflict are poised to impact the economy. The upcoming election season, characterized by persistent political instability, stands as a significant risk to the implementation of reforms aimed at stabilizing growth, restoring confidence, and ensuring sustainable debt.
The report underscores the importance of disbursements from both multilateral and bilateral partners, emphasizing their critical role in reserve accumulation, maintaining exchange rate stability, and fostering improved market sentiment.
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