Lahore:
The external sector has begun to lose steam. From July to February FY22, the trade deficit remains around $ 30 billion. Although the export growth of merchandise is 28%, imports growth of around 49% worsened the trade deficit. Despite the growth of 7.4% in remittances, the transaction deficit reached $ 12 billion.
As a result, Pakistan became a net borrower of around $ 12 billion from all over the world. Foreign exchange reserves held by Bank State of Pakistan (SBP) declined despite the results of sukuk and resumed the extended funds (EFF) IMF. In the week ended March 18, 2022, foreign currency reserves floated at around $ 15 billion which covered almost two and a half months of import.
Rupee’s nominal exchange rate floated around 182. There was a gradual decline in nominal rupees in recent months. When there is a gradual decline, the currency remains protected from a speculative attack. On the other hand, a quick decline in the value of the rupee manifests a speculative attack because the currency movement depends on the capital flow. When there is a large flow of capital, the rupee will appreciate as it has happened around the middle of last year.
Rupees are valued from 165 to 152 in a short span of time. However, it continued to experience depreciation since then. Although the exchange rate regime continues to bring economic stability for a short time, it is the introduction to the challenges of competitiveness in the medium term. In addition, speculators become confident about the direction of the currency and try to confirm their position, which carries volatility to the currency market.
The history of the fixed exchange rate history shows that it has created competitiveness for developing countries. When the economy develops grow, the dollar is needed to finance the necessary capital goods and raw materials. Dollar demand increases with economic growth. Therefore, the dollar’s income capacity is significant together with economic progress. In the case of Pakistan, exports and delivery of money gives dollars to finance the need for the desired foreign exchange needs.
Statistics from the past five years show that export covers around 53% of imports in the economic stabilization phase. In this phase, fiscal savings and strict monetary policy slow down the economy. Instead, export covers 43% of imports when the economic growth rate is around 5%. Rupee devaluation also affects the policy level. The state bank has increased the policy level from 7% to 9.75% in the past six months. Slow adjustments at the policy level are related to the upcoming selection cycle.
The state bank is careful to increase the policy level despite a large devaluation of rupees. If the government was in the first year of its government, adjusting the policy level would be sudden. Given the high inflation rate, central banks in developed countries have begun to increase policy levels.
The US Federal Reserve has increased the level and has signaled further an increase in the coming months due to price increases in this country. Central banks in other developed countries will adjust their rates. In short, inflation in Pakistan is structural. The upward adjustment at the policy level will slow prices with economic slowdown costs.
Rupee devaluation has begun to slow down the economy. Take a situation that appears into the account, the probability of adjustment to the top at a high policy level.