Muneeb ur Rehman

Frequent fluctuations in the value of the Pakistani rupee against the US dollar are adversely impacting the country’s economic growth. Talking to WealthPK, Aliya Hashmi Khan, a member of the Monetary Policy Committee (MPC) of the State Bank of Pakistan, said the volatility in the exchange rate does not augur well for the strength of the market, sending a signal of instability to investors. The graph below taken from the Pakistan Economic Survey (PES) for the Fiscal Year 2022-23 reveals that after the Turkish Lira, it’s the Pakistani rupee that has witnessed a massive devaluation.

According to Aliya, private investment can contribute significantly to the GDP growth rate. When the exchange rate exhibits an unpredictable behavior, it sends a negative signal of uncertainty in the domestic market, she added. Highlighting the negative impact of fluctuations in the value of rupee against the greenback on the foreign direct investment (FDI), she said, “The foreign direct investment (FDI) serves as a crucial instrument for developing countries like Pakistan to facilitate the transfer of technology. When faced with an unpredictable exchange rate regime, potential investors typically adopt a 'wait and postpone' approach.” Since the economy of Pakistan is predominantly import-driven, the wild swings in the rupee value for the last couple of months hindered seamless flow of machinery imported by traders.

Thus, volatility is anathema to the GDP of the country. Not only imports but also exports (major contributors to the country’s economic growth) receive the ripple effect of the rupee-dollar fluctuation. The traders involved in cross-border transactions encounter challenges when conducting international dealings. The exchange rate volatility acts as a hindrance to exports. However, Aliya expressed a sense of optimism, as the gap between the interbank rate and the open market rate of the USD dollar has narrowed. She said this would possibly help Pakistan to experience less volatility in its exchange rate.

Credit: INP-WealthPk