Sir Fareed

Topic: Economy

Devaluation of PKR

The price of PKR against the dollar in the year 2000 was PKR 37 to $1 (USD)

In 2008, it was PKR 62 to $1

In 2013 PKR 84 to $1

In 2017 PKR 98 to $1

(May June July-care taker) In 2018 PKR 124 to $1

In Nov 2021, PKR 154 to $1

Factors responsible for such devaluations

1. Declining dollar reserves resulted into the abnormal depreciation of the pkr

2. Dollar reserves in the state bank depreciated because of trade deficits

a. In 2021, the trade deficit was $30 billion

b. Debt servicing

$14 billion were being paid off towards external sources

Outcome: pressure on the pkr

3. Dollar reserves with the commercial bank also declined

a. Reasons

i. Money laundering
1. The foreign currency is being smuggled abroad

ii. Account holders withhold their dollar amount from the banks

1. Depleting dollar reserves from the commercial banks

Resultantly, the demand and supply phenomenon is badly affected i.e. the demand of dollar is more
against the depleting dollar reserves.

This results in:

• The price hike of dollar i.e. the demand is more and the supply is less

• Availability (i.e. supply) of pkr is more and demand is less

The policy of artificially controlling the pkr was abolished and the currency was made to free float. It
could, resultantly, not compete with the dollar and the outcome resulted in the depreciation of the
currency.

PKR was artificially stabilized

Reason #1

How?

Dollar was released by the SB to commercial banks to make the dollar more available i.e. the supply
increased to stabilize the rupee. This is the indirect (or artificial control) of the currency.

Loss?

The $ released to the commercial banks by the SB was taken in the form of loan

Result

The rupee was successfully stabilized artificially but the foreign loan increased tremendously. This
was a central factor for the government to revoke the policy of artificially controlling the rupee.
Therefore, it was of no surprise to see the pkr jump from 98 to 124 within 3 months of the caretaker
government.

Reason #2

Quantitative easing

How?

The printing of the pkr by the SB is conditioned with 5 currencies

Dollar
Pound
Euro
Riyal
Yen

But primarily it is the USD. Therefore, whenever the SB prints more notes against the dollar reserves,
devaluation of the currency is the natural outcome.

This happened in 2010 and 2011 wherein PKR 521 bn were printed and in 2013-14, PKR 648 bn were
printed

Outcomes/Impacts

1. Inflation (increase in prices)

a. Every imported product became expensive because every foreign product is

purchased in USD but sold in pkr (therefore resulting in the devaluation of the rupee
e.g. in May 2021, PKR 154 against $1 and currently (Nov, 2021) PKR 169: $1

b. The major products which got expensive include:

 i. oil and gas-primarily imported

ii. Electronics, mobile, laptops

iii. Automobiles and their spare parts became expensive

iv. Edible oil, pulses, etc. every imported products became expensive

c. Locally produced products also became expensive

i. Why?

1. Because the raw material for majority of the locally produced

products are important. For example oil and gas along with the spare
parts of Pakistan's automobiles because it merely assembles them
instead of manufacturing them

2. More than 30% of the cotton is imported to meet the demand of the
textile industry

3. Therefore, locally produced products are expensive too because the

raw materials for it are imported

4. Electricity and gas tariffs resulted in massive price hikes

a. Reason

i. Devaluation of the pkr

ii. The expenses of the general consumer were

skyrocketed

2. Increase in the volume of foreign loans

Recall that a foreign loan, of whatever currency, is to be repaid in that currency (i.e. a foreign
loan of USD needs to be repaid in USD). How is it repaid?

Dollar is purchased from the local market

a. For $1 bn PKR 154 bn (May, 2021)

Solutions

Bring USD to the country. How?

Short-term solution

a. Acquire loan (bail out packages)

i. Not a permanent solution

ii. Taken to stabilize the dollar reserves

b. Increase remittances
 • Definition of remittances:
Money sent by the Pakistani diaspora/expatriates through banks and registered money
exchangers is called remittances

• According to 2021, KSA remittances amounted to $7 bn, UAE $5 bn, UK $3 bn, US $2.5 bn,
Oman $1 bn (State bank of Pakistan figures)

For the Pakistani economy, remittances play the major stabilizing role. In 2020-21,
Pakistan had a trade deficit of $30 bn while debt servicing was $14 bn i.e. $44 bn were
gone from the country. However, $29.4 b arrived in remittances and therefore the
shortfall of the dollar was reduced from $44b to $14.6 bn

Stabilizes the dollar reserve and around 6 to 7 million of Pakistani families are dependent
on remittances for their financial needs in the country.

How to further increase remittances?

i. Regularize the non-registered money exchangers

1. Many of these exchangers were involved in terror financing, money laundering or both

2. FIA had a strong crackdown against such money exchangers. However there are exchangers
who are not involved in such practices but people also send money through these money
exchangers

ii. The banking sector must be made more and more competitive so that people send money to
families via banking channels

1. The dollar-rupee conversion rates should not be more lesser than the private banks.

iii. Quick delivery

1. E.g. within 24 hrs, money will be transferred to your account

2. Roshan Digital Account

a. Is a revolutionary move launched in September 2020.

b. Salient features:

i. An overseas Pakistani can open his own account in any Pakistani

bank

ii. Passport copy and business/job details and open within 2 hrs

iii. Make investment in diverse sectors e.g. real estate, stock exchange

iv. Roshan Digital Certificate is a bond-an investment

v. Online shopping, paying bills, fees paying of educational institutions,

car financing

In conclusion, $ 2.6 bn were accumulated last month and around 200,000

accounts were open. This is just the beginning and it’s a huge development. 9
million Pakistanis are overseas and there are goals to make this the norm.
 Proved to bring huge increase in remittances. In 2019-20, $21.7 bn and in
2020-21, $29.4 bn

1st quarter 2021-22, $8.04 bn received (highest ever amount in the history of
Pak for any quarter)

c. Increase exports and decrease imports i.e. by promoting the production sector

d. Increase foreign investment

e. Shift pak-china trade to a Currency Swap Agreement (CSA)

i. In 2021, we had $8.2 bn deficit with China

LOAN (s) -

In 2008: 6 trillion pkr out of which foreign loan was 37b dollars

2013: total loan was above 12t pkr out of which foreign loan was more than $ 62b

In the first two fiscal years of the current government, the total loan increased by PKR 9 tr
while the foreign loan surpassed $117 bn

Why was there a hike in loan?

a. Budget deficit

i. In 2020-21 4 tr

ii. In 2019-20 4.1 tr

Loan= $12 bn

iii. In 2018-19

Loan= $13 bn

Acquiring loans by exhausting commercial and state banks. When internal sources are
exhausted, external sources are sought.

b. We take loans to support the depleting dollar reserves

i. To artificially stabilize the pkr

ii. Why loans?

1. To finance projects

a. Electricity, transport, etc. is based on loan-based investment-a

healthy aspect of providing loans

b. In Pakistan, the financing project is a recent phenomenon

 2. We are embroiled in a vicious circle of a debt trap i.e. to pay off a loan, we
need to acquire loan

a. In 2017-18: 9bn loan paid off, more than $10 b acquired

b. In 2018-19, 10 bn paid off but $12 acquired

c. 2019-20, $13 bn acquired and $12 bn paid off

3. Loans always has conditions attached

a. IMF conditions devalue rupee

Solution(s)

1. Acquire more loan but the process must stop to find breathing space to introduce tax,
industrial, agriculture reforms

2. Bring dollar to the country

a. How?
i. Remittance
ii. More exports
iii. Increase Foreign exports/investment

Loan, remittance and devaluation

Trade deficit

In FY 2020-21, the total trade deficit was $ 30 bn

How?

Exports= $27 bn
Imports=$ 57 bn

In 2018-19, the trade deficit was $31 bn

Exports= $24 bn
Imports= >$55 bn

In 2017-18, the trade deficit was > $35 bn

Exports= <$24 bn
Imports= >$59 bn

Above indicates that there has always been a trade deficit.

Why?

#1-Import for CPEC and textile based machinery

Reasons Pakistan has been having such a huge trade deficit

Import of machinery made one of the major factor of trade deficit, From 2015-20 the major factor for
the import of machinery were CPEC based projects like the machinery imported for energy projects
including dams, coal, gas, solar, wind projects.

• Import of machinery for the construction of high altitude bridges, tunnels, etc.

In FY 2020-21, a major reason for the increase of machinery was textiles. This included $2.6 bn
imports.

#2-Import of Hydrocarbons

In 2020-21, more than $17 bn of oil and gas was imported.

Why?

• Because more than 60% of electricity in Pakistan is generated from oil and gas

#3-The declining production sector of Pakistan

How?

2007-2016, more than 35% of the mega textile units shifted abroad-mostly to Bangladesh

Majority of the leather industries in Punjab were closed down

More than 80% of the cottage industry units got closed

There has been a substantial decline in the agriculture sector of Pakistan

• Biggest in the cotton production (reduced by more than 50%+ in the last two decades)

• Pakistan used to export fruits and vegetables to neighbours and now we need to import it e.g.
apple, tomato, onion

Increase in population and the not growing of the production sector

• Increase in population remained a central feature of increase in imports

• In 1998 census there were environ 140 m whereas in 2017, 220 m and there was no
correlation on the rise of production sector. Outcome: the attainment of bumper crop in 2021,
yet we have to import wheat and sugar

Impacts:

1. Depleting dollar reserves

2. Current account deficit

a. Pays external and internal resources with the current account

3. Depreciation of the PKR

Solutions:

1. Adopt protectionism

LOAN - 2008: 6 trillion pkr out of which foreign loan was 37b dollars
2013: total loan was above 12t pkr out of which foreign loan was more than 62b dollars
a. Trade deficit was reduced from 35b to 27b

2. Promote the production sector

a. Promote industry

b. GST 17%, 13%

c. 2019-30 13 bn textile export

Therefore

1. promote industry

a) Textile industry (our strength)- give subsidies, bail out packages, reduce gst (17% to 13%),
reduce electricity tariffs

b) promote electronics: mobile companies coming, automobile companies coming in already China,
Koran most importantly Volkswagen (german) Mercedes, Audi BMX

2. invest in agriculture: (strength again). a) modern irrigation tech, b) more canals c) latest scientific
methods of seed plantations d) qualitative etc

2021: bumper crops of wheat, sugarcane, rice and maize taken but it will be better if we revive cotton

Need of more plantation of fruits and veggies

• Edible oil, plive and palm

invest in livestock and poultry: so that our meat and milk production could increase and as a result
export will increase

Reduce dependency on hydrocarbons

• 2027 targets
o 15000 mw hydel
o 4,500 MW wind
o 5000 MV civil nuclear

The production of these alternatives will reduce dependency on hydrocarbons