Main Reason Behind Currency Devaluation in Pakistan

Currency Devaluation in Pakistan

Currency devaluation in Pakistan is making headlines as rupee plunges to historic low against dollar. On March 21, 2018 Pakistani rupee plummeted to an all-time low of 109.50 to dollar.

As per March 27, the currency has depreciated to 115 per dollar, and experts are speculating it to further go down up to 120 Rs against dollar.

So, what are the factors behind the currency devaluation in Pakistan? Does it has to do anything with upcoming general elections? Or, finance ministry in collaboration with State Bank of Pakistan is deliberately doing it in order to bolster the dwindling economy of Pakistan?

Reason Behind Currency Devaluation in Pakistan

Media reports suggest Pakistani Rupee is witnessing historic depreciation as State Bank of Pakistan has withdrawn its support and allowed the market driven rate to float. Till, December 2017, Pakistani Rupee was trading at an overvalued price as finance ministry had planned to maintain a fixed exchange rate in order to maintain less competitive exports.

But, why the State Bank of Pakistan is now withdrawing its support from keeping the Pakistan’s currency stable and allowing the currency to depreciate down what experts are calling its real value.

Here come the main reasons

Currency Devaluation in Pakistan

1. An Increased Account Deficit

Condition of Pakistan’s economy in term of budget deficit and balance of payments is not encouraging. According to media reports that quote the financial experts, Pakistan faced an account deficient of almost $12 billion during the fiscal year 2017-18 which makes for the 4 percent of the GDP.

2. Fall in Foreign Exchange Reserves

As a result of increase in account deficit the foreign exchange reserves of Pakistan have declined to $12.1 billion from $17.4 billion in 2017. The decline in foreign exchange reserves calls for an increase in country’s exports which are likely to boost due to depreciation of currency.

3. Meeting the Pressures of Payment

Media reports also suggest that State Bank of Pakistan has allowed the currency to lower due to some “payment pressure”.

Well, governments across the globe depreciate their currencies for servicing the sovereign debts, which might be a payment pressure in recent case of Pakistan.

Impact of Currency Devaluation

Governments and their central banks need to be careful enough for exercising a policy of depreciating their currencies.  In a short run, the approach can increase the demand of exports, as they become cheaper. Further, it also allows to maintain a balance of payment which is offset by increased imports, decline in foreign reserve and increase in budget deficit. Thirdly currency devaluation also helps in debt servicing.

Harms of Currency Devaluation in Pakistan

The abysmal state of Pakistan’s economy that also needs a strong support from practical ways to stop corruption, can face an adverse effect from depreciation in rupee value. Currency devaluation in Pakistan make it difficult for the country to meet the foreign debt obligations and also face an increased account deficit for a need to rely on more debt financing from international lenders.

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