Is dollar going to touch 180 PKR after IMF bailout?

[Mav3rick]

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.

 

[ps3linux]

good to talk to a rational person on the other side after long time. and i'll tell you i as ver sincere what i said in my earlier post.

actuall under Modi we progressed a lot, GDP will start growing leaps and bounds ... more and more FDI is coming, Make in India will start show its colors, corruption is down .... dont want to argue with you.

since you know what is right for your country. But the above numbers are so frightening that i cant help but to put the post

and if you want to see real colors of china? then read this link,
https://asia.nikkei.com/Opinion/Duterte-reaches-moment-of-truth-over-China

this is not happening for the first time, and i can tell you its already happening in pakistan. soon you will find mini-china like ghettos built in pakistan where local people wont be allowed to go. im up for correct if this is not true

Saner voices are already raising concerns in this regards, while visiting sri lanka couple of years back 3 to be exact I could not find the reason for their expensive motorway, it did not link two commercial hubs, nor did the port eventually ended up being leased out to China for 99 years. I am a proponent of the fact there are no permanent friends no permanent enemies only permanent interests.

We threw away our Saindak Gold/Silver/Copper mine to china for which I think nothing has been received so far as payment except for Mr. Zardari's pvt accounts.

FMV (fair market value) of PKR vs dollar tends to agree at an exchange rate of Rs.152 thats what I guess they were asking Asad Umar, metals are an attractive investment considering the fact that pkr is going down and international gold prices are expected to hit $1400 by end of this year and silver may be $18. Crypto is total B.S with the crackdown of different states I don't see crypto doing as good as it was earlier.

On a separate note politically if one looks close enough far right is gaining popularity and this is not good for global peace, are we going to see something on the scale of WWII dont really know but unless far right fails it precarious.

 

[The Accountant]

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.

Real demand for USD is from import ... You are missing those ... Just look at our current account deficit and you will get the picture of demand supply gap ...

Furthermore PMLN brought the reserves to 21 billion through loans but what were the reserves at the time they left?

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.

Bro I disagree over your analysis ...

Yes you are right that import becomes expensive due to de-valuation but thats the whole idea that imports becomes expensive in comparision to local products ... For example we have 2 chocolates, one is local from all local ingredients and one is imported from all imported ingredients ... by devaluation only imported chocoloates will become expensive but the local one which are creating jobs will remain at same local price on the contrary they will become cheaper in international market and might be able to compete with international products ...

 

[ps3linux]

Real demand for USD is from import ... You are missing those ... Just look at our current account deficit and you will get the picture of demand supply gap ...

Furthermore PMLN brought the reserves to 21 billion through loans but what were the reserves at the time they left?




Bro I disagree over your analysis ...

Yes you are right that import becomes expensive due to de-valuation but thats the whole idea that imports becomes expensive in comparision to local products ... For example we have 2 chocolates, one is local from all local ingredients and one is imported from all imported ingredients ... by devaluation only imported chocoloates will become expensive but the local one which are creating jobs will remain at same local price on the contrary they will become cheaper in international market and might be able to compete with international products ...

There is another side to it, while I agree that the Rich should not be subsidized at the cost of rest of the country and rupee should be allowed to devalue inline with inflation so as to keep exports competitive, but the other side is import heavy industries like chemical, pharmaceuticals, plastic manufacturing concerns mainly autoparts manufacturing, batteries and other industries products become expensive simply because we don't have basic manufacturing so there is a balance that must be struck otherwise we might get stuck in hyper inflation cycle or stagflation.

 

[The Accountant]

There is another side to it, while I agree that the Rich should not be subsidized at the cost of rest of the country and rupee should be allowed to devalue inline with inflation so as to keep exports competitive, but the other side is import heavy industries like chemical, pharmaceuticals, plastic manufacturing concerns mainly autoparts manufacturing, batteries and other industries products become expensive simply because we don't have basic manufacturing so there is a balance that must be struck otherwise we might get stuck in hyper inflation cycle or stagflation.

Exactly ... we need heavy investment but unfortunately our elites are busy in investing in real estate sector

 

[VCheng]

There is another side to it, while I agree that the Rich should not be subsidized at the cost of rest of the country and rupee should be allowed to devalue inline with inflation so as to keep exports competitive, but the other side is import heavy industries like chemical, pharmaceuticals, plastic manufacturing concerns mainly autoparts manufacturing, batteries and other industries products become expensive simply because we don't have basic manufacturing so there is a balance that must be struck otherwise we might get stuck in hyper inflation cycle or stagflation.

I am sure PMIK will take all aspects into consideration when deciding about the IMF bailout and the terms that it offers to Pakistan. AFAIK he has still not made the decision about it.

 

[ps3linux]

Exactly ... we need heavy investment but unfortunately our elites are busy in investing in real estate sector

I have been banging my head against the wall since I came back we need to put a check on real estate, we need to have almost the same type of laws on residential, rental, commercial and investment property as US. Even met Shaukat Tareen when he was finance minister but unfortunately we don't realize unless we invest in business means value addition our economy will always be weak. Hell even lithuania has better exports than us.

I am sure PMIK will take all aspects into consideration when deciding about the IMF bailout and the terms that it offers to Pakistan. AFAIK he has still not made the decision about it.

Sir jee that's what worries anyone who has know how of economy, we know $1 billion and change eurobond is maturing so we have to pay that, another $9 billion payment is coming up IMF knows it, GoP knows it in all honesty I don't question the competence of his team what I am worried about it their loyalty to Pakistan or international financial institutions (read financial team not IK himself), after almost destroying pak economy's gains in the last few year where did shamshad akhtar go, ADB back to her old job. That's the real worry.

 

[VCheng]

I have been banging my head against the wall since I came back we need to put a check on real estate, we need to have almost the same type of laws on residential, rental, commercial and investment property as US. Even met Shaukat Tareen when he was finance minister but unfortunately we don't realize unless we invest in business means value addition our economy will always be weak. Hell even lithuania has better exports than us.

The property bubble will burst if proper policies are instituted, causing much grief.

 

[jupiter2007]

No. Unlikely.

No. Unlikely.

If it will go down, it will not go down further than 165. Friendly Nations are already helping Pakistan by opening up export market. Hopefully we will see better days in 3years.

 

[YeBeWarned]

i heard that by 2020 it might touch 170 mark .

 

[1Paki$tani]

I understand increase in dollar price might not be good but at end of the day if it linked with economic policy and increase in exports that it is not that bad either. yes 145 mark is bad but than again is it really bad.

Australian dollar in 2011 Australian dollar was $1.06 v USD 1. It has now dropped to $.71 to USD 1. a 33% decrease. This was deliberate policy by the government so that the Australian exports can become cheaper.

Though Pakistani rupee has sunk 65% during the same period. But we had to take benefit of that by concentrating on industries so to increase export but that is where the problem lies. Remember USA accuses China of keeping its currency at artificially low value.

 

[ps3linux]

i heard that by 2020 it might touch 170 mark .

Very much possible as finance people already think that inflation will be in double digit YoY this year thus PKR has to be depreciated by that percentage.

I understand increase in dollar price might not be good but at end of the day if it linked with economic policy and increase in exports that it is not that bad either. yes 145 mark is bad but than again is it really bad.

Australian dollar in 2011 Australian dollar was $1.06 v USD 1. It has now dropped to $.71 to USD 1. a 33% decrease. This was deliberate policy by the government so that the Australian exports can become cheaper.

Though Pakistani rupee has sunk 65% during the same period. But we had to take benefit of that by concentrating on industries so to increase export but that is where the problem lies. Remember USA accuses China of keeping its currency at artificially low value.

Every country which has improved its exports over the last 60 years has done it by keeping their currency undervalued as compared to dollar thus their exports become cheap (read competitive) and imports remains expensive, problem is we don't have anything to export except labor right now. IT exports both by companies and free lancers is improving but the shitty network PTCL and few others are providing is a big hindrance. Although it is not taxed. We can benefit through better law and order and take advantage of our strategic location by connecting CAS/Russia to Gwadar, China to Gwadar but by the way I am hearing agreements are being made they are possibly going to become debt trap for Pakistan, like the IMF has already warned.

 

[1Paki$tani]

Very much possible as finance people already think that



Every country which has improved its exports over the last 60 years has done it by keeping their currency undervalued as compared to dollar thus their exports become cheap (read competitive) and imports remains expensive, problem is we don't have anything to export except labor right now. IT exports both by companies and free lancers is improving but the shitty network PTCL and few others are providing is a big hindrance. Although it is not taxed. We can benefit through better law and order and take advantage of our strategic location by connecting CAS/Russia to Gwadar, China to Gwadar but by the way I am hearing agreements are being made they are possibly going to become death trap for Pakistan, like the IMF has already warned.

That is where our problem lies. The majority of investment or loan that we took in Past 10 years either went to payment of subsidies, welfare or on development projects which do not produce long term income.

Had we spend that money on dams (diamer bhasha dam has gone from $4 odd billion to $12 billion), electricity generation, gas importation (pipelines) such TAP and Pakistan - Iran, fixing up Grand Trunk Road rather than orange line or metros. these are things that would have helped us with exports. These things would have generated economic activity thus greater taxes which could have been spend on building metros and orange lines.

Electricity generation and availability of gas would have allowed our textile industry to flourish which went in reverse while countries like Bangladesh and Vietnam increased by up to 700%.

Our exports in 2003 were $11.903 billion, while 2007 it increased to $17.838 billion and 2008 - $20.279

than PPP and PMLN struck Pakistan. so our exports in 2011 were $25 billion (keeping in mind there was some flow on from previous gop) but than it hit a brick wall.

2012 $24.6 billion
2013 $25.120
2014 $24.70
2015 $22.08
2016 $20.533
2017 $21.877

https://wits.worldbank.org/CountryProfile/en/Country/PAK/Year/2017/TradeFlow/Export

as you can see we started to go in reverse. when world was moving forward we were going backword.

our FDI shows similar signs


https://www.ceicdata.com/en/indicator/pakistan/foreign-direct-investment--of-nominal-gdp

 

[Wa Muhammada]

I bought ripple for .78$ and since then it sunk [emoji16]

Gold all the way

 

[Mav3rick]

Real demand for USD is from import ... You are missing those ... Just look at our current account deficit and you will get the picture of demand supply gap ...

Furthermore PMLN brought the reserves to 21 billion through loans but what were the reserves at the time they left?

Roughly a bit over USD 11 Billion, that's how much the PML(N) Government left in the coffers. Please also remember that PML genuinely believed that they would come into power again, they almost did, which is indicative of their comfort with the budget and the reserves.

As for the real demand for USD, yes that too is a factor but only for interbank transactions as all international (legal channel) payments are made through SWIFT.

Bro I disagree over your analysis ...

Yes you are right that import becomes expensive due to de-valuation but thats the whole idea that imports becomes expensive in comparision to local products ... For example we have 2 chocolates, one is local from all local ingredients and one is imported from all imported ingredients ... by devaluation only imported chocoloates will become expensive but the local one which are creating jobs will remain at same local price on the contrary they will become cheaper in international market and might be able to compete with international products ...

Sadly, you have not considered the fact that we are importing things which we either don't or can't produce/manufacture. Our top 10 imports are:

01. Oil Products: 28.4%
02. Machinery (including Computers): 10.4%
03. Electrical Equipment: 7.2%
04. Iron/Steel (including Scrap from Ships etc.): 6.1%
05. Chemicals: 4.6%
06. Vehicles (including items assembled in Pakistan): 4.3%
07. Plastic/Items: 4.1%
08. Animal/Vegetable Fats, Oils etc.: 3.5%
09. Oil Sees: 2.4%
10. Cotton: 2.1%

Of the above, we CANNOT produce/manufacture items 1, 2, 3, 5, 6 and 9 which sums up to 57.3% of our total import. Out of import items at number 4, 7, 8 and 10 (15.8%), a good 8-10% are things which we cannot produce/manufacture and will need to import. These are things for which we simply have no local alternative.

Not just that, things which are being produced locally are sub par, of low quality and more expensive than the imports. This could also be because of higher cost of production (electricity and imported machinery, raw material etc.), monopoly and greed.

Coming to your example of chocolates, imported and local; imported chocolate will become more expensive with the rise in USD but so will the local chocolate as we import raw material (cocoa etc.) and machinery (including consumable/running/spare parts). Also, with the PKR losing its value, the local chocolate will further suffer because it's value will decrease with the same price and hence will have to increase. Worst of all, you can rest assured that the imported chocolate is of higher quality (ingredients, quality control, packaging, machinery etc.). Consider the 1.1 million (USD 8,570) Alto and compare it to its Japanese counterpart (USD 5,200) and you would be amazed at the difference in quality, comfort and safety of the cheaper Japanese version versus the more costly Pakistani version. With the difference in currency and other import strangulation policies, you are essentially forcing the common man to 'compromise' on his family's safety and luxury for a much more expensive but inferior vehicle/product/quality of life.