Currency Devaluation in Pakistan- Causes, Impacts and Suggestions Starting from the currency, it is a unit of exchange, which is in the form of money and allows you to facilitate the transfers of goods and services. And devaluation means, a reduction in the value of a specific currency with respect to some other monetary units. Devaluation is derived from the word de-value which is usually considered a means of correcting a deficit in the balance of payments. In simple words, it means to decrease the value of a nation’s currency with respect to the price of gold or currencies of other nation. So, according to this definition, devaluation of a currency occurs in terms of all other currencies, but it can be easily understood when compared with only one other currency. Like in Pakistan, we always elaborate our currency devaluation in terms of the US dollar. It is not a new phenomenon but is there for ages, early currencies were usually in the form of gold or silver coins and whenever the government was short of money or metals, they abruptly decrease the weight of coins, but today’s modern age of flat currencies does not come with any significant inherent value, and their value is maintained by a fixed exchange rate policy against the US dollar or other major currencies in the world. In the earlier days, devaluation of currency was a matter of prestige, however, with the passage of time, it was learnt that such an operation sometimes becomes mandatory to save the country from economic hardships. Today, there are plenty of experts who believe that sometimes it is in the best interests of a country’s economy that they should lower the value of their currency. And the fact is that it does help because a weaker currency boosts manufacturing and production, thus uplifting the employment ratio, but that does not mean that a lower currency will boost the economy. It helps the economy to keep on going, but what if you the government keeps on lowering the price of rupee against dollar, foreign investors will eventually stop investing in the country, causing a state of recession. When it Becomes Necessary to Devaluate a Currency?
Well, there are certain circumstances under which it becomes mandatory for a country to devaluate its currency. And these situations are: When the interaction of market forces and policy decisions are unable to justify the currency’s fixed rate exchange. When you are unable to spend your foreign exchange reserves in order to purchase all offers at the fixed rate. When you are supposed to reduce current account deficit.
When you are having some policy issues and want to boost aggregate demand in the market. Causes of Currency Devaluation in Pakistan
Following a flexible exchange rate of Pakistani rupee and US dollar, Pakistan is a country where exchange rates are determined by supply and demand of foreign exchange in the domestic markets. Our supply of foreign exchange mainly comes from foreign investments, foreign loan, remittances and exports. The State Bank of Pakistan does not follow any fixed rate of exchange, if the demand of foreign currency is higher than the supply, our exchange rate will tend to depreciate. Statistics show that Pakistani rupee is continually losing its value and it is this continuous decrease in the value of Pakistani currency that our foreign debt burden has increased by trillions of rupees during last five years. Though it is a fact, the currency was not stable even before PML-N’s era, however, since the day they are in power, this depreciation has kept on going at an accelerated pace like never before. Given below are some of the major reasons behind this continuous devaluation of Pakistani rupee. High Inflation Rate: This is one of the crucial reasons behind the devaluation of money, and this inflation rate is on a rise with a pace that is hard to beat. The State Bank of Pakistan has always felt the urgency of issuing more currency due to this high inflation rate, but they...
Please join StudyMode to read the full document