Rising US Dollar Dominates Exchange Rates – Challenges and Impact on Pakistan’s Economy

Rising US Dollar Dominates Exchange Rates

At present, the US dollar dominates exchange rates in Pakistan, leaving both banks and forex companies feeling somewhat powerless. Financial Experts in the country contend that the rates for the dollar quoted by banks and exchange companies don’t reflect the situation of economy truly. Pakistani Banks are hesitant to present the real picture to the people of Pakistan, fearing potential reactions from the State Bank of Pakistan. In the meantime, exchange companies are also reluctant to reveal the truth due to the fear of regulatory actions against them by the concerned authorities.

US Dollar Dominates as State Bank Updated

As the State Bank’s updated that the dollar’s closing price in the interbank stands at Rs303.05 at present, in stark contrast, the Exchange Companies Association of Pakistan reported an open market rate of Rs318. This clear-cut disparity creates uncertainty in the financial sector throughout Pakistan.

As the IMF set the condition for opening imports, banking circles have shown grave concerns over the matter. Banks all over Pakistan are worried that the incoming current dollars might not be adequate to meet the ever-increasing demand from importers. As a result, currency dealers in banks are cautious of initiating the opening of letters of credit for imports for the local businesses. It’s pertinent to state that banks are accountable for providing the necessary dollars for these credit letters and in this state, bank which are the front line of defense, are the most vulnerable.

Government is anticipating substantial inflow of dollars into Pakistan in the coming month are utterly dismissed by the bankers stating they are baseless prepositions and until something is not materialize bankers have refused to comment on speculations. Bankers all over Pakistan choose to focus on the tangible economic performance, which requires measured steps towards imports and exchange rates in Pakistan.

Economy experts anticipated a cautious and better approach in terms of dealing with financial issues of Pakistan, but the recent transition from PDM government to the interim setup has further exacerbated the crises. Within the first 18 days of this interim setup, the dollar has appreciated by Rs14.40, jumping from Rs288.65 on August 11 to Rs303.05 in the interbank market.

Whereas in the open market, the dollar’s price hit Rs318 on Tuesday, compared to Rs296 on August 11 when Anwaarul Haq Kakar assumed office. It represents a substantial increase of Rs22 per dollar within this short period of time, leaving every financial expert flabbergasted.

In this regard, customers have also expressed discontent with exchange companies as well as banks, accusing the banks of double-play that exchange companies and bank do not provide dollars at the ranks that are publicly announced by the authorities. Economy experts suggest that the actual open market rate floats in the range of Rs325-335, a figure closely resembling the ‘grey market’ rate.

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It is also revealed in the state bank report that not only dollar is making gains against the rupee; other major international currencies are also appreciating significantly in comparison to Pakistani rupee. Such as, British pound has surged by Rs27 to reach Rs403 on Tuesday, up from Rs376 on August 11.

Likewise, euro has also appreciated by Rs21 to Rs345, and the Saudi riyal has risen by Rs6.25 to Rs85.50. It’s pertinent to mention that remittances from foreign countries are playing a major part in Pakistan’s economy. In the Financial Year 2023, Saudi Arabia alone accounted for $6.5 billion in remittances from Pakistanis, followed by $4.056 billion from the UK, $3.09 billion from United States of America, and $3.122 billion from other European Union nations.

In order to better educate the readers, follow reasons for currency devaluation as well as actions to curb devaluation are discussed hereunder in a brief manner.

Rising US Dollar Dominates Exchange Rates

Factors Leading to Currency Devaluation:

Trade Imbalances: If a country consistently imports more than it exports, it may lead to a shortage of foreign currency reserves, putting pressure on the domestic currency.

Political Stability: Political instability, corruption, or a lack of economic reforms can erode investor confidence and lead to currency devaluation.

Global Economic Conditions: Global economic factors like changes in interest rates, economic crises in other countries, and fluctuations in commodity prices can impact exchange rates.

Inflation: High and persistent inflation can erode the purchasing power of a currency, making it less attractive to investors and causing depreciation.

Speculation: Market sentiment and speculation can influence exchange rates. Negative sentiment or speculative attacks can lead to rapid currency depreciation.

Actions to Curb Currency Devaluation:

Foreign Exchange Reserves: Building and maintaining an adequate level of foreign exchange reserves can help stabilize the currency by providing a buffer against external shocks.

Exchange Rate Interventions: In some cases, central banks may intervene in the foreign exchange market to stabilize the currency, buying or selling their own currency to influence its value.

Monetary Policy: The central bank can use monetary policy tools, such as adjusting interest rates, to control inflation and stabilize the currency.

Transparency and Communication: Clear communication from government and central bank officials regarding economic policies and their commitment to stability can help build confidence.

Fiscal Policy: Sound fiscal management, including reducing budget deficits and managing public debt, can improve investor confidence.

Structural Reforms: Implementing structural reforms to improve the business environment, attract foreign investment, and boost exports can help address trade imbalances.

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