In the complex world of finance, there are many aspects that need to be considered to comprehend the intricate problem of foreign exchange, which has an impact on the value of currencies in different countries. Understanding Pakistan’s open-market currency rates in depth is essential for both private individuals and businesses wishing to invest in foreign currencies. This article aims to provide a comprehensive overview of Pakistan’s open market currency rates and the factors influencing them
The exchange rate of a country’s currency, particularly if it is a developing one, is one of the most crucial measures of the health of its economy. The economy of Pakistan is reliant on imports. The Pakistani Rupee (PKR)’s value relative to other major currencies in Pakistan is heavily influenced by open market exchange rates.
In this article, we will take a closer look at the open market currency rates in Pakistan and how they are determined. We will also discuss the factors that can affect these rates and the impact they have on the Pakistani economy.
The Importance of Open Market Currency Rates in Pakistan
Open market currency rates refer to the exchange rates of different currencies in a free market (the exchange rate is the price of one currency concerning another currency) where the value of one currency is determined through the forces of demand & supply, as opposed to a controlled or fixed rate set by the government. In Pakistan, the open market currency rates are updated daily and are used as a benchmark for the value of different currencies.
The importance of open market currency rates lies in their ability to provide an accurate representation of the demand and supply of different currencies. They are also used to determine the exchange rates for cross-border
transactions, such as imports and exports, foreign investments, and remittances.
The open market currency rate is the rate at which a country’s currency is exchanged for another currency on the open market. In Pakistan, the open market currency rate is determined by supply and demand for different currencies. The rate can fluctuate daily and is influenced by several factors.
Factors that Affect Open Market Currency Rates
Several factors can affect the open market currency rates in Pakistan. Some of the most significant factors include:
Higher interest rates tend to attract foreign investment, which can increase the demand for a country’s currency and lead to an appreciation of its value. However, this is more applicable to advanced economies like the United States of America where firms, people, and even different governments invest in US treasury bills, while developing low-income countries like Pakistan have no attraction for foreigners to invest in Pakistani T-Bills.
Political stability can attract foreign investment and boost a country’s economy, leading to an appreciation of its currency. Yes, it is a very crucial factor as investors require peace and stability to do their business, this is one of the main hindrances in attracting foreigners to take long-term investment ventures in Pakistan.
Because there is more demand for that country’s currency to pay for its exports, a country with a trade surplus (meaning higher exports than imports) will often have a stronger currency. This factor has numerous empirical examples, most recently China’s recent economic growth is attributable to an export-led economy.
Inflation: A nation’s currency may lose value because of high inflation, as inflation is like a tax on money, and no one likes to pay unnecessary taxes. For the nation, it has two negative effects: on the one hand, company costs rise, and on the other, increased prices make things less affordable for the public.
Impact of Open Market Currency Rates on the Pakistani Economy
The open market currency rate can have a significant impact on the Pakistani economy. A strong currency can make Pakistani exports more expensive, which can negatively impact the country’s export-dependent industries. On the other hand, a weaker currency can make Pakistani imports more expensive, which can lead to higher inflation and negatively impact the country’s consumers.
Overall, the open market currency rates in Pakistan are a complex and dynamic indicator of the country’s economic health. It is important for businesses, investors, and policymakers to closely monitor the rate and its underlying factors in order to make informed decisions.
How the Exchange Rate is related to overall Economic Health.
It is clear that the exchange rate is ineffective in improving the trade balance based on the evidence from past studies and from empirical evidence. Additionally, we have noted that the Pakistani economy is being burdened by an increase in external debt because of currency depreciation. It has been noted that the entire volume of commerce between Pakistan and its partners is more than the burden of debt rises caused by depreciation.
Trade Balance in 2020
Here is the data on major trade deficits with Pakistan’s trading partners.
A significant deficit arises in Pakistan’s balance of trade due to heavy imports from China, UAE, Indonesia, Saudi Arabia, Qatar, Malaysia, Japan, and Korea, and as a result which Pakistan has a trade deficit with these
Whereas Pakistan’s highest export demand comes from USA & European countries and resultantly Pakistan has a trade surplus with these countries.
Positive and Negative Effects of Open Market Currency Rates
The exchange rate of a currency is the price of one currency against the price of another currency and the price is determined by the demand for that currency in the foreign exchange market. Exports represent the demand for local currency in the forex market and imports as the demand for foreign currency in the local market. Therefore, in an open market, exchange rates are determined by the forces of supply and demand. In Pakistan, an open market exchange rate system was introduced in the 1980s and has since had a significant impact on the economy.
Increased competitiveness: A flexible exchange rate system makes exports more competitive, leading to an increase in exports and a boost in economic growth.
The attraction of foreign investment: A stable exchange rate attracts foreign investment, which can provide capital and technology to spur economic growth.
Stabilization of inflation: A flexible exchange rate can help stabilize inflation by reducing the cost of imported goods, which make up a significant portion of the country’s consumption basket.
Volatility: Open market exchange rates are subject to rapid and frequent fluctuations, which can lead to instability in the economy.
Balance of payments: Rapid fluctuations in the exchange rate can lead to imbalances in the balance of payments, which can lead to a shortage of foreign currency and a decrease in the country’s international reserves.
Inflation: Fluctuations in the exchange rate can lead to inflation by increasing the cost of imported goods, which can result in a rise in prices for consumers.
Overall, Pakistan’s open market currency rates system has hurt the country’s economy by increasing inflation due to higher import prices and, more importantly, by having a severely negative impact on the national budget
without the requirement for borrowing.
For instance, if a country owes $120 billion in debt and is required to pay back $10 billion annually, and further assume that the exchange rate increases from 50 to 55 per USD, this country’s liability will increase suddenly from 6,000 to 6,600 (in local currency, or LC), requiring LC 550 instead of LC 500, which must be recovered from taxpayers through direct or indirect taxes. However, with effective policies and management, its positive effects can be maximized while minimizing its negative
The idea of Open Market Currency Rates and their implementation
The balance of trade is managed using the exchange rate as a policy variable. According to the well-known J curve hypothesis, local currency depreciation will make foreign goods more expensive for residents and domestic goods less expensive for foreigners. As a result, imports will drop and exports will rise, improving the trade balance. However, neither this investigation nor numerous preceding ones discovered any proof of the J curve’s existence for Pakistani trade data. Only if imports and exports are sufficiently elastic to the fluctuation of the exchange rate will the J curve theory hold.
Most of Pakistan’s imports are essentials, and they are unaffected by changes in the exchange rate. Therefore, the value of imports will grow due to the currency depreciation, and the amount of external debt measured in local currency will also increase. The country’s economy will be heavily burdened by the devaluation of the currency given the size of the external debt that must be paid. Therefore, the overall impact of currency depreciation is an increase in both debt levels and import costs.
The Historical Performance of the Pakistani Rupee
The Pakistani Rupee has historically faced fluctuations and devaluation due to a combination of factors such as political instability, the balance of payment deficits, and inflation. The devaluation of the Rupee has been a common phenomenon in the country’s history and has resulted in a significant decrease in its value.
The open market currency rates have a significant impact on the exchange rate of the Rupee. When demand for foreign currencies such as the US The dollar increases in the open market; it leads to an appreciation of those
currencies and a corresponding depreciation of the Rupee. Conversely, a decrease in demand for foreign currencies results in a devaluation of those currencies and an appreciation of the Rupee.
The government of Pakistan has intervened in the past to stabilize the value of the Rupee through measures such as imposing restrictions on currency trading and buying/selling of foreign currency. However, these interventions have not always been successful in preventing devaluation and have sometimes resulted in a shortage of foreign currency, leading to difficulties for importers and foreign investors.
In conclusion, the value of the Pakistani Rupee has been historically affected by a combination of factors, including open market currency rates, political instability, and inflation. It is important for the government to maintain stability in the currency markets to encourage investment and boost the country’s economy.
The Historical Performance of the Pakistani Rupee
Information from 2013 through 2023 showing the historical exchange rate between the US dollar (USD) and Pakistani rupee (PKR). It shows a long-term trend of the USD strengthening relative to the PKR, with the rate of exchange rising dramatically from 2022 to 2023.
It’s important to remember that a number of variables, such as macroeconomic conditions like low exports and low foreign exchange reserves coupled with high debt servicing, government tactics used to delay the IMF program, and global events like the increase in oil prices as a result of the conflict between Russia and Ukraine, are some of the main determinants of worsening open market currency rates.
In conclusion, the open market currency rates in Pakistan do not yield positive results in boosting exports and decreasing the volume of imports. The major reason for this situation is that Pakistani exports are not price-sensitive, i.e., demand for Pakistani exportable goods does not increase due decline in price (here price is PKR with respect to other currencies). Understanding these dynamics is crucial for businesses, investors, and policymakers to make informed decisions and navigate the Pakistani economy.
Pakistan’s trade balance has remained consistently negative throughout its history of Pakistan, with imports outpacing exports as a result, PKR continues to depreciate. The country has implemented various exchange rate policies in an attempt to address this imbalance, but they have had limited success in reducing the trade deficit, rather than being unable to yield positive results. The government’s continued focus on stabilizing the economy and improving the trade balance remains a crucial challenge and addressing the root causes such as competitiveness and diversifying exports will be key to long-term success.
The solution to the Issue
The challenge of balancing a nation’s payments can be difficult and call for multifaceted strategies. The following are some potential remedies to Pakistan’s balance of payment problems:
Encourage Exports: By increasing
exports, Pakistan can earn more foreign exchange and will be able to reduce its balance of trade issues. Pakistan has diversified its exports which are at present predominately at present rely on cotton and allied industries.
Import control: By limiting imports, a country can reduce its need for foreign exchange and improve its
balance of payments. Imports of non-essential goods and services must be discouraged.
Increasing foreign direct investment (FDI): It can aid the country’s much-needed balance of payments
requirements by creating an atmosphere that is conducive to investors and by improving the country’s educational system to develop knowledgeable, competent people for potential investors.
Promote tourism: By drawing more visitors, the nation can increase its foreign exchange earnings and potentially resolve its balance of payments issues. However, a tolerant and peaceful Pakistan is necessary for this.
Monetary and Fiscal Policies: The government can employ monetary and fiscal policies to manage the economy and control inflation. This will lower the cost of doing business and have a beneficial influence on the balance of payments by lowering interest rates & inflation.
Economic diversification can benefit a country’s balance of payments by reducing its reliance on a limited number of exportable goods like textiles, cotton, and related industries.
These are merely a few potential solutions to Pakistan’s balance of payment problems; when formulating a precise course of action, it is crucial to take into account the particular circumstances and limitations of each nation.