Galloping Dollar

A girl in a tuck shop started squalling in front of her mother as the shopkeeper told them about the unavailability of an imported item of her choice. It was amusing to see the way he was exhausting his attempts to explain the economics behind the ban on imported items to that little girl, where even the well known economists have kneeled down to this dark alley. It is not the only Pakistani rupee (PKR) that is experiencing the shock waves of brutal thunderclap of dollar. Dollar index, a barometer for gauging dollar’s strength, touched its climax at 115 points in September, highest in the last 20 years; this is an indication that the currency is gaining momentum against other anchor currencies in the wake of policy stance adopted by those in Washington D.C.

“We will keep at it until we are confident the job is done.” The statement came straight from the chair of the Federal Reserve (Fed) of the United States (U.S.) expressing his resolution to douse the smouldering inflation in the U.S. He was explicit in his statement that he does not fear hiking interest rates any further, even if this means pushing the U.S. into recession. On September 21, for the third consecutive time Fed spiked the benchmark interest by 75 basis points to 3.25% and this figure is forecasted to rise to 4% before entering into 2023.

An aggressive hawkish stance is in line with the expectations, keeping in view the present hike in global energy and food prices amid Russia-Ukraine crisis. Global competition has lost its strength following sanctions over Russia thus knocking down its trade activities with the European Union that lifted the lid on prices of oil and other products. As a consequence, the U.S. reported YoY inflation of 8.3% for August, the worst in the last 40 years. Fed officials are determined to bring down this to a targeted figure of 2% by keeping a tight monetary policy ahead!

Fed is raising policy rate since March 2022; however, inflation has been persistent and moved sideways only, a red alert that a disaster of epic proportions is in the offing, beyond the Atlantic region especially for heavily indebted economies.

Bangladesh, Pakistan and Sri Lanka in Asia witnessed decremental effects of this dollar drive. Dollar gaining momentum, is a double-edged sword that withers away foreign exchange reserves and at the same time inflates the outstanding loans of heavily indebted economies. In a period of less than three quarters of CY 2022, foreign exchange reserves of countries within the Asia-Pacific region have fallen by $590 billion! Notably, reserves with Bangladesh, India, Pakistan & Sri Lanka have fallen by $7.2 billion (16%), $59.4 billion (9%), $9.9 billion (43%) & $1.3 billion (42%) respectively. This fall is witnessed for two reasons; obvious of the two is the strengthening dollar and the second is attributable to the efforts made by central banks of some of the APAC countries to preserve their currency position by injecting funds into their markets.

Talking about Pakistan, it is plunged into a wall of death with no signs of mercy from external shocks; in the first week of October, Moody’s downgraded Pakistan’s credit outlook from B3 to Caa1 marking it an extremely vulnerable country for investment, considering the increased financing needs with limited avenues of assistance. Likewise, the situation is not comforting internally too, it is in a never-ending episode of capital outflows and a weakening rupee. Poor rupee has experienced the worst plummet in history over a grim outlook of the economy, it found a thin support at a rock bottom level of PKR 240 against dollar in August 2022.

Four main driving factors that explain the jittery of PKR stem from the capital:

Firstly, persistent current account deficit since the start of 2021 owing to rise in international fuel prices has pressurised the rupee. Efforts are being put in to reduce the non-energy/consumer-oriented import bill but this government plan needs sensible adjustments considering the high volume of energy and other non-consumer imports.

Secondly, the relationship with the International Monetary Fund (IMF) is in shambles with prolonged delays in releasing dollar tranches. It provides a comfortable playground to the brokers mafia for artificial dollar surge, who benefit from the unannounced dollar injections by the State Bank of Pakistan.

Before the disastrous effects of the pandemic could subside, the monstrous deluge challenged its economic state of affairs in the third place. A preliminary prediction of the economic loss amounts to $12.5 billion, which is expected to increase manifold in the coming months.

Finally, an incoherent federal and provincial polity with the federation having no absolute power in any of the provinces is a threat to the economic stability.