Mav3rick
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Lets talk about this issue point by point:
1. The reason for a sudden devaluation: The reason for a sudden devaluation in Pakistani Rupee was that for many years exchange rate was artificially maintained by pumping more and more $ in the economy by the previous governments. So basically they were artificially keeping the supply high so that it meets demand and price of $ remains low. Now the problem with this approach is that for a country like Pakistan, where the government hardly has any money in foreign reserves and where the economy is so heavily dependent on imports, if you keep doing that you will have to keep on taking more foreign debt to maintain the supply. This government took the principled stance that the Rupee Dollar parity should be determined by market forces (*Read* our actual economic condition), albeit with some regulation, and not artificially by pumping dollars into the system.
2. Why is it this important?: While previous governments kept on telling us how they have maintained the value of a dollar to a certain level, they didn't tell us how that affects us. Basically they kept on taking foreign debt to maintain this exchange rate, but to what end. Keeping the price of Rupee artificially high, previous governments were incentivizing (and subsidizing) imports while disincentivizing exports. To understand this lets take a simple example. Say a child of yours like to buy expensive Swiss chocolate, he has a pocket money of 1000 Rupees for the whole month, and the chocolate costs 200 Rupees. So the first month he buys a Swiss chocolate bar for 5 consecutive days and ends up spending all the money. He is now left with 25 days in the month and has no money for buying lunch at school anymore. What would you do, so you think you are a caring father/mother and give them another 1000 Rupees so he/she can eat for the rest of the month at school. But he/she again buys 5 more chocolate bars for the next 5 days and spends all of it. So now you what options do you have, keeping giving him/her money so he/she can keep buying expensive stuff, or tell him/her that this is amount you get in a month so spend accordingly. And then he/she starts to learn how he/she can get the chocolate once a month, eat cheap stuff others days and maybe take lunch from home on other days. This is exactly what is happening with Pakistan right now. This government is telling the people that you have been spoiled by our previous governments into thinking that we can keep on importing all the stuff you need, not make anything domestically for your own consumption or for exports and the government will keep taking loans on your behalf. But consider what the costs are, an increasing debt to GDP ratio (the proportion of how much loan you have to repay and the total earnings you do), compromised national security (because the debtors want you to agree to their terms which might affect national security) and eventual bankruptcy. This government is telling us, you ain't got the money to buy the shiny new car, make your own cars or make something else, sell it and then use that money to buy whatever you want.
3. Having an exchange rate high doesn't mean the economy is doing good or bad: Take the example of Japan and Afghanistan, a US dollar gets you 111 Yens while it only gets you 77 Afghani. Does that mean Afghanistan is a richer country than Japan? As a matter of fact, countries that want to increase exports intentionally keep their currency low to make sure exports are incentivized. China is repeatedly blamed by the US that it devalues it currency even below it actual value, to keep an upward pressure on exports and downward pressure on imports.
4. Is investing in US Dollars a good idea?: Well, the interest rate in Pakistan is close to 10%, and real estate/property appreciates in Pakistan at around 30% a year. So there are many other better venues to park your money as compared to Dollar.
5. Final thoughts: This is not from a profitability perspective, but if you have money lying around, invest in a business in Pakistan. It will earn you money, keep the money circulating in the economy, create jobs and generate real value in the society.
**Update**: Forgot to add, in my opinion, the Rupee is very close to its actual value right now, and any devaluation we see, if any, would be minimal.
A very long and thought out post, I will not call it well-thought because it lacks the basic understanding of economics and growth. Let me reply to your post in the same numerical order:
1. You are almost there on the point that the USD was, perhaps, artificially maintained at a lower rate but what you missed in the analysis is the fact that $KR ratio is determined by demand, which is actually manipulated by hoarders rather than genuine requirement of the USD in the open market. Whenever big players want to, they can simply create an artificial demand of USD by buying 10-20 million USD from the market (our's is a very small USD market) and suddenly the USD shoots up. In contrast, actual demand is very low (only by people who proceed outside the country). Students, Business etc. can just as easily pay the fees, invoices etc., through Banks (Telegraphic Transfer) and don't need to convert money locally or buy USD. The PML Government pushed reserves up to USD 21 Billion which was more than sufficient for our economy at that time and this despite the fact that the previous PPP Government had left the coffers empty. In any case, the surge too, generally, is artificially created by players who hoard USD, for personal or political gains.
2. The example you presented, again, is not very thought out because it is left incomplete. You left out the most important part about how the parent comes up with the money/finances to sustain the child's demand. I assume that by child you meant the citizens and by parent you meant the Government. Anyway, what you implied as a luxury is actually the basic requirement of 80% of the population which is in abject poverty. The Government provides subsidies to those who need it the most and without that those people would have no other option but to commit suicide.
3. This is the most crucial and critical part of your post, while having a lower or higher exchange rate is not the only indicator of the performance of economy, it is still a good indicator. And high or low, the exchange rate should be 'favourable'; in terms of an export oriented economy such as Japan or China, a lower exchange rate is favourable to their economy as their exports far outweight their imports; On the other hand, economies such as Pakistan which have far more imports get affected negatively, and that too severely, with a high exchange rate. It simply means that an average Pakistani will have a lower buying power whether it be consumables or goods such as Diesel, Petrol, Turbines, Computers, Mobiles etc., or raw material/chemicals such as those used in fertilizer, seeds, medicine etc. Had the situation been reversed and our imports were around USD 25 Billion and exports USD 60 Billion, a higher exchange rate would be in our favor (lower currency translates to lower priced exports and higher margin of competition in world trade). However, with the rising cost of each USD, we are actually taking away the common man's buying power because let's face it, we don't make or produce anything other than some textile and edibles. Even the machinery that we need for textile and agriculture is getting out of reach of those who need it the most because of the rising USD and in this regard it will further strangulate our export potential.
4. Agreed.
5. Agreed.