Devaluation is usually
undertaken as a means of
correcting a deficit in
the balance of payments.
Some analyst are of the
view that weakening the
value of currency could
actually be good for the
economy – since a weaker
currency will boost
exports, which in turn
will lift
employment.Another
result of devaluing the
currency is the
reduction of government
debt because the
government is paying
debt holders (treasury
bond investors) with
cheaper rates.
Devaluation means
decreasing the value of
nation’s currency
relative to gold or the
currencies of other
nations. .
In each previous
instance, abrupt
devaluation brought
about economic distress,
which lasted for several
years. There is no
justification in
repeating actions that
have failed in the past
The Pakistan’s rupee
plunged to about 115.5
per dollar in early
trading from 110.5 at
Monday’s close, traders
said. Abid Qamar,
spokesman for the State
Bank of Pakistan (SBP),
told Reuters the rupee
plunge was a "market
driven" event by
Bloomberg It is their
drug. Your pain, is
their joy.
“If reserves keep going
down and there’s no
mechanism to finance
deficits then you’re
left with only one
option -- devaluation,’’
Salman Shah, a former
Pakistani finance
minister, said in a
telephone interview from
Islamabad. “They
couldn’t support the
rupee at the level it
was and the central
bank’s ability to
intervene in the market
has vanished.’’
There are many reasons
why devaluation and
raising tariffs have
been detrimental to
Pakistan’s economic
development in the past
are:
First, the country’s
imports are inelastic
and a weaker rupee will
not help. Mostly, they
consist of raw materials
(petroleum, chemicals
and metals),
intermediate goods or
machinery. Any
devaluation would
increase their cost and
thus make Pakistani
exporters less
competitive.
Secondly, devaluation
will raise the cost of
servicing our external
debt. Currently it is
estimated to be around
$70bn. If the rupee
declines by 25pc, so
will the external debt
in local currency.
According to government
figures, devaluation of
rupee during 2008 to
2013 caused the debt to
swell by Rs1.909
trillion in local
currency. Thus,
devaluation instead of
easing the balance of
payments will further
exacerbate it.
Third, devaluation
always increases
inflation as essential
items such as petroleum,
food and chemicals
constitute almost half
of our total imports.
When elections are
around the corner and
there is so much
instability, can the
government afford to
make life more difficult
for the poor and the
middle class?
Fourth, it has taken the
country almost 10 years
to rebuild investor
confidence to an extent.
International investors
are gradually making a
comeback. Their
investment in the local
stock exchange reached a
15-month high last week.
Miftah Ismail,
Pakistan’s de facto
finance minister, last
month told Reuters that
his country will not
need another bailout as
exports are increasing
and foreign reserves are
being well managed.
Capital Economic, a
macroeconomic research
consultancy, said it
expects the government
to keep running down its
foreign reserves until
after the election in
order to keep the rupee
pegged.
"Once the election is
out of the way, however,
more drastic action is
likely," Capital
Economics said in a
research note.