Devalued Currency
For the past few years, Pakistan has been undergoing critical depreciation of the currency, known as the Pakistani Rupee or PKR. Economists, policymakers, and society are witnessing such threats. Their economic implications are significant and profound to affect inflation rates and living standards. Let’s go deeper into the possible causes behind the low PKR value, its consequences, and ways to deal with that problem in this blog.
The Background of Currency Devaluation
Currency devaluation is defined as the condition in which the currency of a country loses its value against other currencies. In Pakistan’s context, it is surfacing through PKR breaking all-time records with major currencies, especially the US dollar. Understanding this background will lead to the formulation of workable strategies to counter it.
1. Economic Unsteadiness
Major causes of PKR depreciation start at broader economic instability that has been following Pakistan. It is characterized by low growth rates, high inflation, and rising unemployment. Economic mismanagement in the form of ineffective fiscal policies and lack of structural reforms throws doubts over the confidence of domestic as well as foreign investors.
As a result of inconsistent economic policies, as well as changed governments, which in the case of any country, happens to be unpredictable, this factor may discourage investors to be committed to an unstable economy, hence capital flight and the weakening of the currency.
2. Trade Deficits
Pakistan has experienced a massive trade deficit for some decades now, wherein the country imports more goods and services than it exports. This accounted for the massive pressure on PKR. There is an enormous demand for foreign currency as the country has relied on imports for its necessary goods, from oil to machinery and whatnot.
Though the government has been trying to improve exports, lack of diversification, high production costs, and competition from other countries have offset the same. The inability to boost exports more exacerbates the trade deficit and contributes to the falling currency value.
3. Political Uncertainty
The political instability in Pakistan has had a significant influence on the downfall of the PKR. Constant leadership changes, political strife, and civil unrest create a threatening climate of instability within the country that deters investment from within the country and overseas investors. Investors prefer stable environments where they can ascertain returns on their investments.
This might induce capital outflows, while capital flight enhances the shock effect of currency devaluation. An unstable situation has ripple effects on the economic situation, which tends to make it more difficult to recover from.
4. External Debt
Another colossal challenge that Pakistan faces is its growing external debt. The country is subjected to borrowing for funding development projects and budget deficits, casting question over repayment capacity. In case of a large pile-up of external debts, the investor confidence level goes down, as well as susceptibility to more immense external shocks, which further weakens the PKR.
The service burden of this debt, especially during PKR devaluation, commonly puts stresses on the government spending for essential services and projects due to fiscal constrictions. This just creates a vicious cycle of stagnation in the economy, sustaining the currency fall.
Effects of a Low Currency
The currency value of PKR has deep impacts on Pakistan’s economy and the people:
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1. Inflation
The most immediate effect of the sliding currency is inflation. The PKR’s devaluation contributes to increased imports costing more than before, which in turn pushes up prices for products and services offered. Basic food, fuel, and many other items become very expensive and strain the household budget.
Severe inflation reduces the purchasing power of the families, which is also a difficult situation as they cannot afford the most basic items. This can be very tough for poor families whose earnings are largely absorbed by the most essential commodities.
2. Increase in Cost of Living
As inflationary prices continue to soar in Pakistan, living costs have become phenomenal. It would be impossible for standard cost of living of families to be sustained by wages as wages gradually fail to keep pace with the increasing price levels, further expanding the income-expenditure gap. Poverty levels and social unrest tend to increase with this gap.
3. Effect on Businesses
A low currency has mixed effects for firms. Exporters benefit from PKR at this level since their goods become cheap for the international buyer. Importers, however, incur rising costs. Most Pakistani firms rely on raw materials imported; hence increased prices squeeze profit margins.
This might result in layoffs, decreased investments, and overall, deceleration in economic activities. Economic development would get heavily handicapped if the business environment were to be weakened, pushing the economy further into stagnation.
4. Foreign Investment Deterred
The fall in the value of PKR deters foreign investment, which is primarily a driver of economic development. Investors generally like stable currencies and predictable returns environments. The depreciating currency speaks volumes about the instability it poses behind it and deters potential investors from making any investments.
Absence of foreign investment stifies innovation and growth, and therefore the country fails to develop core areas as potential sectors to somehow turn around the fortunes of the currency.