KARACHI: Business community has expressed concern over exchange rate erosion terming it damaging for the economy.
Chairman of National Business Group Pakistan and President Pakistan Businessmen and Intellectuals Forum (PBIF), Mian Zahid Hussain has said that rupee is weakening despite improved exports and remittances which is not good for the economy as the budget was planned to keep in mind the value of a dollar at Rs153 which has now climbed to Rs160.
Mian Zahid Hussain said that the rise of the dollar will hit key budgetary projections, increase interest payments and make almost everything costly.
He said that the weak rupee is making petrol, diesel, LNG, edible oil, wheat, sugar, pulses and many other things costly which in turn will collide with buying power of masses.
If the government opt to subsidise a few things, it will increase the budget deficit while the weak rupee is also contributing to high price and low imports of raw material and machinery used to manufacture export items.
He noticed that trade deficit which was 24 billion dollars in 2020 has increased to 30 billion dollars in June which need immediate steps.
He noted that the central bank has helped the economy a lot and has kept interest rates unchanged to keep the momentum of economic revival therefore it should now accept the challenge of keeping the value of dollar in control. The total foreign debt has increased to 118 billion dollars while 17 billion dollars have been borrowed from foreign sources during the last three years therefore further borrowing is not advisable.
Vice President of Pakistan Businesses Forum (PBF) Ahmad Jawad said that Pakistani rupee has lost almost 50 percent of its value since December 2017 and if the country is already experiencing economic problems such as higher inflation or unemployment, floating exchange rates may make the situation worse.
If the country suffers from higher inflation, depreciation of its currency may further drive the inflation rate higher because of increased demand for its goods; also the country's current account could also be worsen because of more expensive imports.
He said market based exchange rates have a big drawbacks; when moving from one equilibrium to another, currencies can overshoot and become highly unstable, especially if large amounts of capital flow in or out of a country, perhaps because of speculation by investors. This type of instability has its economic cost.
To get the appropriate result, many emerging economies have tried a hybrid approach.
Jawad said even market based floating exchange rate leads to unnecessary movement of capital inflows and outflows which can severally damage an economy that has sound fundamentals.
The country which recovered from the South East Asia crisis the fastest was Malaysia. It imposed capital controls despite opposition from international financial institutions and global market players.
Another example is China's yuan which has been allowed to fluctuate within a narrow band with outstanding success for the country's industrialisation and rapid economic growth.
Even former Prime Minister of Malaysia Mahathir believed that the fixed currency lent stability to the country.
One must understand a floating exchange rate is determined by the private market through supply and demand and a fixed or pegged rate is a rate the government [state bank] sets and maintains as the official exchange rate. "The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment".
Copyright Business Recorder, 2021