ziaulislam
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Better way to understand overvaluation is this..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.
You suddenly claim that value of a pencil is 100rs and you arr ready to buy it from every one(the pencil is the rupee which is govt granteed product) everyone will rush to buy that pencil for 10 rs ans sell it to you on 100rs...
In essence rupee value has gone down due to low productivity and higer lending from state bank(rupee printing) thus if govt wants to increase the real effective rate it has to do less of the above not by jacking up dollars in open market
). What can a sane government do except increasing price of Dollar to such a level that people are forced to abandon Imported goods when they get to expensive? while keeping fuel prices stable with subsidies so that economy is not jammed by skyrocketed fuel prices (Which exactly current government is doing, Dollar price is increaasing repidly while keeping fuel Prices low). What if this step was taken 5 6 years ago to control the trade deficit? Ye din dekhna parta?
