Brother, the exchange rate is pretty much at its baseline level of on average 6-7 percent yearly depreciation. The question is why should be accept the 6-7 percent yearly depreciation? Why have we had this for 40 years? what can we do to avoid this the next 40 years?
I am not an economist but my simple mind tells me that if the exchange rate is fixed to a certain amount greater than it should be. Over the long term 5-10 years, exporters will not be thinking of exporting and instead go in import business with focus on consumption. The exchange rate is determined based on dollars in (exports and remittances) versus dollars out (imports plus loan payments). Because on the fixed exchange rate, the imports should go up, especially with economic growth happening while exports would stagnate or even decrease- which they did. (Also since it’s an import based economy inflation should be minimal since all our imports would be cheaper given the over valued exchange rate)
So now as our economy grows we are in a balance of payment crisis burning our reserves to keep the rupee at a certain level. This means now we need more dollars to keep the exchange rate fixed but we can only get dollars through exports organically or through loans. Now nothing wrong with loans to build things in Pakistan which will give back - Tarbela dam has given multiple times it’s loan value back to Pakistan. Issue is if we take loans to keep the rupee pegged, some day in the future we have to pay those loans back. So we go to IMF that forces depreciation to a level and we maintain that.
Over the last 40 years we have kept the rupee fixed and taken pride in the 60 rupee or 100 rupee or whatever. No industry develops because it’s cheaper to import than to produce locally. We have lost out on industrialization. We are per capita one of the worst countries when it comes to exports. But given our planning this makes complete sense.
Compare this to China, google how the US wanted to sanction them in the 90s and 2000 for keeping their currency purposely weak.
This State bank is changing this. They have let a free float rupee while encouraging exports. There are even reports that when the rupee was running at 150, the state bank was actively buying dollars to not allow it to get too strong to hurt exporters. This will certainly lead to inflation over the short term but over the long term what happens. The exact opposite of what I said earliar. The exports will increase, and imports to some extent also(natural). Eventually our economy is able to adapt so it’s more export based so when we grow at 5 percent we don’t go in to a massive CAD and to the IMF. Instead we can grow at 7-8 percent as its export based. Dollars come in more along with remittances. More pressure on rupee to get stronger as opposed to weaker as exports always going up. The economy changing takes time. Exports take long to grow - setting up a factory takes years. The rupee organically gets stronger and not artificially. If anything we artificially keep it weaker to push our exports and force industrialization in our country. What they are doing makes sense to me. Doing the same thing again and again and expecting different results is madness….
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