The Causes of Pak Rupee Devaluation
During the month of May’08 Pakistan Inter-bank and Kerb forex marketswitnessed a sharp decline in Pak Rupee value versus US$. Despite the CentralBank’s intervention and some regulatory steps, Pak Rupee continuously losingits value. Under a floating FX rate system, the exchange rate decline isexpected & a necessary component of the adjustment mechanism. There are so many factors that cause currency crises to occur, i.e. economic,political, corruption, etc., but to determine the route causes of current crises,let us focus only on the major economic variables, these variables areinterlinked with each other, therefore, it cant be sure that which one triggersthe other:
(Includes decline in Export commodities prices orinclined in Import commodities prices) One of the major and mostdiscussed cause of current crises is the ever-rising price of importedcrude oil, which hit close to a record $127 a barrel on May 15 and anall-time high of $128 a barrel the next day amid widespread fearsover stretched global energy supplies.
Expansionary fiscal or monetary policies
adopted by theprevious government in order to stimulate the economy, and whichcause aggregate demand to grow at a pace higher than domesticsupply. The gap between aggregate demand and domestic supply isfilled by imports. The result is that imports grow more quickly thanexports. Current account deficit goes up, which has to be financedthrough either falling foreign exchange reserves or capital inflows.Capital inflows, however, may not be forthcoming because of lack of trust in the country’s financial situation.
, previous Government resorts to borrowing from thecentral bank or from foreigners to meet huge PSDP expenditures.Borrowing from the central bank increased the inflation. High inflationis proved lethal for export, because it distorts prices. In particular,inflation increases the input cost of exportable goods and makesthem less price competitive.As far as foreign liabilities are concerned, Pakistan total externalliabilities surged to $45.822 billion by the end of March 2008,compared to $42.882 billion on December 31, 2007. Although formerPrime Minister Shaukat Aziz and his team of ministers claimed thattheir government had broken the begging bowl, figures of the StateBank of Pakistan (SBP) showed a different picture. Five years ago on June 30, 2003, total external liabilities of the country stood at$35.439 billion. The break-up of figures shows that public andpublicly-guaranteed debt increased to $40.479 billion by March 31,2008, which was $37.836 billion on December 31, 2007