Should we be concerned about the almighty dollar game?

Published: January 27, 2014
SHARES
Email

Increasing the interest rate to keep the dollar in check will risk inflation. Who wants to raise prices? Any takers? PHOTO: AFP

As someone who works in the finance industry, I am frequently asked, at social events, about where I think the dollar is headed. Although I’m not sure if people are genuinely showing interest in our economy or just trying to count their dollars their loved ones sent them from abroad.

Regardless of their reasons, I value their intrigue nonetheless.

The greenback affects our lives whether we like it or not.

Pakistan looks to the US for just about everything – aid, trade, political arm twisting, you name it. So it’s important to understand how our economy reacts to the dollar game.

But whether we should only be concerned about the dollar is the real question.

The dollar market works like any other market. Its main driver is supply and demand. Recently, the dollar has dipped a little, raising questions about whether this is a result of economic wheeling and dealing by the government or something more temporary only to fizzle out soon.

The biggest source of dollar for us is foreign remittances. This phenomenon picked up post 9/11 when a myriad of people, in fear they might be targeted for belonging to a certain race and country, sent as much as their whole life savings back home. The huge dollar influx meant more of it was sold in the market, thus creating a demand for the rupee.

I’m sure most of us remember the golden days when a dollar cost no more than Rs60. Government representatives of that time, some of whom feature regularly on talk shows these days, would like to tell you it was nothing but pure genius on their part which was the real reason for the favourable rate.

You may now go ahead and roll your eyes at that.

The remittance volume is still quite high. What has changed is our need to make debt payments back to the International Monetary Fund (IMF) and other creditors. What need to change are our priorities. Depleted dollar reserves have become a frequent story in the business section of any newspaper.

While the state bank has a few options up its sleeve – namely printing more money or increasing the interest rate to keep the dollar in check – they run the risk of inflation.

Who wants to raise prices? Any takers?

With a majority of our population under the poverty line, raising prices is one problem nobody wants.

The only solution is to strengthen our economy and improve our tax collection. There is a need to ensure proper supply of gas and electricity to industries and to promote merit over nepotism and corruption. We should not rely on foreign remittance as who knows when that well may run dry.

The question should be about where our economy is heading and not the dollar.

Until we actually look at the strength of our economy first, you can bet your bottom dollar that darker days lie ahead.

Asim Shuaib

Asim Shuaib

A finance executive who writes in his spare time. Gym aficionado, MMA fan, and a kickboxing legend in the making.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • anon

    The whole debate about keeping PKR strong is harmful for Pakistan as it hinders the development of Pakistani exports.
    Devalued currency has some benefits for a country as well. It reduces imports as they become more expensive. It increases exports as they become cheaper for outside world and become more competitive with other countries. It gives a boost to local industry and gives a nudge to be more independent. This can result in higher employment. Some countries deliberately try to keep their currency devalued to boost their local industry. Devalued currency certainly has some negative impact on people as well as they can’t buy as much with their old salary and decreases their life standard.
    Artificially keeping PKR strong is bad for the economy of Pakistan. As long as Pakistan keeps relying on remittances, which are good in the short term but bad in the long term as Pakistan is not only losing its human capital but also gets a false sense of prosperity, without developing industry and exports.Recommend

  • Hussain

    That reminds me, i gotta send some dollars back home.Recommend

  • hadiya anis

    quite an informative and interesting read.Recommend

  • Asad Khan

    Say, that is Interesting, nice write, especially coming from the Youngs of the nation.

    Dollar is backed by nothing but the confidence on US technology, its market, its industrial innovations, Military muscle & recently Shale Gas.

    The problem of Pak is that she rely too much upon the Dollar. One can not eat a Dollar when one is hungry, one can not run his car on Dollar if his car run out of gas, same is the case of the Rupee or even every Currency for that matter.

    So, Yeah, Pak has potential of Hydro, Shale, Hydrates, Fertile Soil, Working Age Population, Minerals, Taxable folks & what not. But everybody just love going after Dolly Dollar.

    regards,

    (PS : ALOE BLACC – I Need A Dollar)Recommend

  • Parvez

    When more than half your law makers and most senior bureaucrats and other big guns ( to cover the rest ) have their interests parked outside the country, the urgency to think and do what is right for the economic wellbeing of the country is just not there.Recommend

  • atif

    thankyou for a waste of seven minutes. Talks like strengthen economy and improve tax collection are easier said than done!Recommend

  • Necromancer

    Yes because dollar is acceptable in almost every part of the globe and it is the only legal medium of exchange for OILRecommend

  • Necromancer

    Something Sensible people need to understand the dynamics of trades and economics it is not easy to keep a free floating currency under reinRecommend

  • Kiran

    and so we should stop talking about it too? Recommend

  • Kiran

    Its about time the PM brought back his dollars and converted them to rupees. What better way to show confidence in your economy?Recommend

  • Asad Khan

    – True, but it has its prime, now slowly the world has started to think beyond Dollar.

    – legal??? I would use the word official.

    regards,Recommend

  • disqus_qcSnw3CycG

    Well I am an economics student too, I disagree with you at some points, do you know there are two reasons behind the increase in value of dollar for Pakistan [broadly speaking], first is the obvious one that dollar’s demand is continuously increasing and their economy is going towards boom, but you know what the other reason is, the other reason is Pakistan exchange rate is depreciating means our country’s economy is not stable and we are moving towards recession with a huge money supply but a very less demand making a huge surplus. so you are saying tax rates should be increased because interest rates should remain low to prevent any further inflation I disagree here too, you know what is Pakistan’s current situation here, it facing stagflation, Pakistan is facing hyper-inflation with very high unemployment rate and dependency rate, tax evasion is already too high in Pakistan what do you think will happen when government increase taxes, tax evasion would increase,government spending is already not enough and if our government use those little funds that they are using on the people right now to pay back their debts they will face a serious cash flow problem resulting in taking more loans this will only worsen the economy of Pakistan even more.Recommend

  • disqus_qcSnw3CycG

    I disagree with you at some points too anon, but first let me tell you I fully agree that devalued currency has advantages too but it has comparatively more disadvantages so even the developed countries don’t go to this strategy without a very good reason behind it. In case of Pakistan, Pakistan’s domestic industries are already too weak they can’t produce enough to meet the market demand and this causes inflation to rise so to control inflation our country has to import goods from other countries to meet our demand but still we can’t full-fill all the demand this is causing inflation to rise rapidly means prices rises too quickly and when consumers are unable to buy them industries fall or shutdown increasing unemployment which tells that Pakistan’s situation is stagflation as I told in my first my comment, so if according to you Pakistan let’s it’s currency devalue any longer Pakistan will have to pay more for the same amount of goods and Pakistan have no other choice because it’s market supply isn’t enough, so when Pakistan will pay more this mean the good it bought would become more expensive or the proper economic term is imported inflation and this will further damage our economy, If Pakistan doesn’t import these needy goods, it’s living standard would worsen even more, inflation would increase with more rate than ever, so with the solution you provided with I disagree but in you last lines you explained that these imports are good for short term and I agree with you, Pakistan is buying there currency which is aiding their currency to rise and making our BOP deficit, but if Pakistan has to improve it has to maintain it’s imports until it’s domestic industries are able to provide a market supply which at-least makes an equilibrium in simple words that Pakistan should wait until it’s industries can produce enough to meet it’s total demand when that happens we be self sufficient and we will not be depending on our imports, I can provide many reasons and logics according to economics theory to prove you wrong but I realize that my comment is already too long [just revising for my exams]Recommend

  • Alright, as someone with a graduate degree in macroeconomic policy making, please allow me to say that most of that made no sense whatsoever!Recommend

  • Kumail

    Hmmm.. after reading this, good luck with your studies!Recommend

  • Necromancer

    Dude the theory and application defers. In theory you make assumptions like consumer are homo genus, no taxation and stuff like that I like your enthusiasm about economics and we need people like you in Pakistan but with a little more experience of the practical world……….and yes there are countries who keep their currencies devalued for their exports one big example is China……further more Pakistan import’s huge chunk goes toward OIL which Pakistan can never be self sufficient in……..and Inflation in Pakistan is mainly attributed to Government’s borrowing. So next time please vote sensiblyRecommend