Determinants of Currency exchange rates USD to PKR Part-III

Currency exchange rates

Currency Exchange Rates USD to PKR


The current account is one of three components of a country’s balance of payments system that influences the determination of currency exchange rates.
It is the country’s trade balance, or the balance of goods and services imports
and exports, plus earnings on foreign investments minus payments to foreign
investors. The capital account and the financial account are the other two
components. It is also a metric for all international capital transfers. A deficit in the current account shows the country is spending more on foreign trade than
it is earning from trade, hence forced to borrow capital from foreign sources
to cover up the deficit. In other words, the country requires more foreign
currency than it receives through sales of exports. Exports are demand for the local
currency of exporting country currency (as importers will require exporting
country currency to buy the goods and services of the exporting country), whereas
imports are demand for foreign currency of importing country currency (as
exporters will sell their goods & services in their currency). 

The excess demand
for foreign currency lowers the country’s exchange rate until domestic goods
and services are cheap enough for foreigners and foreign assets are too
expensive to generate sales for domestic interests. Analysts and currency
experts witnessed a smooth fall in the value of the local currency against all
major international currencies. particularly US dollar, believe that falling
reserves and rising current account deficit have a direct relationship with the
exchange rate regime. The current account is defined as the difference between
the value of goods and services exported and the value of goods and services
imported. A current account deficit indicates that the country is importing
more goods and services than it is exporting—though the current account also
includes net income (such as interest and dividends) and transfers from abroad
(such as foreign aid), which are typically a small portion of the total.

The difference
between national (both public and private) savings and investment can also be
expressed as the current account. A current account deficit may thus indicate
either a low level of national savings relative to investment or a high rate of
investment—or both. A current account deficit may be natural for capital-poor developing
countries that have more investment opportunities than they can afford to
pursue due to low levels of domestic savings.

If the deficit
reflects an excess of imports over exports, it may indicate competitiveness
issues; however, because the current account deficit also implies an excess of
investment over savings, it may also indicate a highly productive, growing
economy. If the deficit is the result of low savings rather than high
investment, it could be the result of reckless fiscal policy or a consumption

current account posted a massive $632-million deficit in May 2021, compared to
a $329-million surplus in May 2020, according to the State Bank of Pakistan
(SBP), marking the highest monthly deficit since December 2019.


investors are less interested in countries with large public deficits and
debts. The reason for this is that a large debt encourages inflation, and if
inflation is high, the debt will be serviced and eventually paid off with less
expensive real dollars in the future. In the worst-case scenario, a government
may print money to pay off a portion of a large debt, but expanding the money
supply inevitably leads to inflation. Furthermore, if a government is unable to
service its deficit through domestic means (sale of domestic bonds, increase in
the money supply), it must increase the supply of securities available for sale
to foreigners, lowering their prices. Finally, if foreigners believe the
country is about to default on its obligations, a large debt may cause concern.
If the risk of default is too high, foreigners will be less willing to own
securities denominated in that currency. As a result, the country’s debt rating
(as determined, for example, by Moody’s or Standard & Poor’s) badly effect and
exchange rate.

According to
World Bank estimates, the fiscal deficit widened year on year in the first six
months of FY21, as expenditure growth outpaced revenue growth. Total revenues
increased by 3.7 percent, in line with the recovery of economic activity. Over
the same period, total expenditures increased by 6.2 percent, owing in part to
higher interest payments. At the end of December 2020, public debt, including
guaranteed debt, stood at 87.9 percent of GDP, up from 86.7 percent at the end of
December 2019.

confirmed Pakistan’s B3 credit rating with a stable outlook as part of a review
for downgrade, according to a statement from the agency. The statement made it
clear that the rating agency is closely monitoring the government’s actions in
its effort to seek debt relief, with a particular emphasis on whether or not
the government will seek debt relief from private creditors at some point in
the future. “The stable outlook reflects Moody’s view that the pressures
Pakistan is facing in the aftermath of the coronavirus shock, as well as
prospects for its credit metrics in general, are likely to remain consistent
with the current rating level,” according to the statement.


The ratio of
the index of export prices to the index of import prices is defined as the
terms of trade. If export prices rise faster than import prices, a country’s
terms of trade improve because it can buy more imports for the same amount of
exports. TOT = (Index of average export prices / Index of average import prices)
x 100

If export
prices rise relative to import prices, we say the terms of trade have improved.
A unit of export buys more imports than a unit of import. In general, this
raises living standards by making imported goods appear cheaper to consumers.

When import
prices rise relative to export prices, we say the terms of trade have
deteriorated. In general, this lowers living standards because foreign currency
earnings are lower and imported consumer goods are more expensive.

terms of trade fell to 61.80 points in the first quarter of 2021, down from
65.10 points in the fourth quarter of 2020. State Bank of Pakistan is the
source of this information.


investors inevitably seek out stable countries with strong economic performance
in which to invest their capital. A country with such positive attributes will
draw investment funds away from other countries perceived to have more
political and economic risk. We can’t survive without economic growth. In order
for economic growth to occur, we also need political stability. Political
instability, high inflation, and slow growth are all first cousins. Pakistan’s
current status quo consists of three components: extreme political uncertainty,
high inflation, and low economic growth. This status quo can only be maintained
at great economic cost. Pakistan requires governments that prioritize economics
over politics. Pakistan requires governments that prioritize political
reconciliation over conflict. Pakistan requires governments that are doers
rather than just propagandists.


Rates in a fixed exchange rate
regime Currency exchange rates are determined by the government, whereas rates in a floating exchange
rate regime are determined by market forces. Interest rate parity other
theories though provide a logical explanation for exchange rate fluctuations;
however, they fall short because they are based on dubious assumptions (e.g.,
free flow of goods, services, and capital) that rarely hold true in the real
world. The balance of payments model is primarily concerned with tradable goods
and services while ignoring the growing importance of global capital flows. It
failed to explain the dollar’s continuous appreciation during the 1980s and
most of the 1990s, despite the US’s soaring current account deficit.

supply and demand for any given currency, and thus its value, are influenced by
a combination of factors. These elements are classified into three types:
economic factors, political conditions, and market psychology.

Hopefully, readers will be able to grasp the core idea of how, for example, Currency exchange rates USD to PKR are determined.

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