A better question that should be asked before asking “ Why is rupee fluctuating against the dollar ?” is, Why do currencies fluctuate ?
Day in day out, around the world, 195 countries, exactly 180 currencies, life goes on 24 hours a day so does the fluctuations in the respective 180 currencies. You only hear about a few currencies because certain currencies based on the economies of their countries are more powerful than others. Some are more widely used than others. Some are readily available than others.
The more a currency is accepted around the world, the quicker it is adaptable by the people for their use. But it also has to be a fairly stable currency in order for it to get wide acceptance. Nobody wants to use a currency whose value fluctuates more often than not. You do not want to be at a vacation spot or on business trip and have the value of your currency drop drastically and you getting left with no purchasing power.
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Flexible Exchange Rate:
Most of the currencies in the world are bought and sold on a Flexible Exchange Rate basis. What that means is, the higher the demand the higher the price and vice versa. A shortage in the currency will make the price of the currency go higher. So the game becomes of basic supply and demand. Like most economic factors relating to a product. The more the product is in demand, the higher its chances are of its prices going.
When it comes to currencies, unlike products, a currency’s supply and demand are intricately intertwined with certain factors. Factors such as the country’s Monetary Policy (set by its Central bank), Rate of Inflation in a country and the Economic condition of the country.
The way Rupee has been falling in Pakistan against the Dollar, and the way a common man neither understands nor wants to as to why it is happening, panic is being created. And very justifiably so because a common man’s job is not to start studying how the world of finance works. It is the job of the government to ensure that a common tax paying man lives happily without extra burden.
Did I say “A common tax paying man ?”. I guess I did.
Well the ugliest truth albeit remains a truth that in countries where tax is paid timely and in abundance, currency of that country becomes stronger and remains so.
Why ? Because tax is mostly the only income a government has. The more income it has, the more stable its economy will be and the more money it will have to buy and keep foreign exchange in its Central Bank just so if the demand for a foreign currency rises, the government can intervene and give a supply of that currency to the buyers. Pakistan has the lowest tax to GDP ratio. This brings us to the point of a strong or a weak economy.
The less the tax collected, the weaker an economy becomes. Amongst many other factors. The weaker your economy is the weaker your currency can become.
Economy And The Disease:
Your economy is like a human body immune system. If you have a strong immune system then you can fight the strongest of diseases. But if you have a very weak immune system, then even a common cold can kill you. A common cold can turn into a cough, cough into a bronchitis, bronchitis into a pulmonary disease and a pulmonary disease into collapsed lungs. Game over.
And your immune system (your economy) is constantly monitored by the world, by the domestic analysts, and international bodies and banks. If your economy is a weak economy to begin with, and your currency starts to devalue, panic is spread. Because just like a weak immune system based person catching bronchitis, a weak economy catching currency fluctuation promotes panic. Panic brings in speculators who are always ready to benefit from any situation without any regards to the country’s stability and its future.
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If a country has a shrinking GDP, in addition to its money supply changes, inflation rates and interest rates, if it has more imports than exports for a continued period of time, if it has low housing starts, if it has a ballooning Current Account Deficit, a widening Budget Deficit, a high rate of unemployment, a low rate of foreign visitors who can bring foreign exchange, along with other factors, you can bet your last penny that the currency of that country is a disaster waiting to happen.
And that disaster in the waiting is now happening.
It is happening because we never grew our exports. We never controlled our imports. We never paid attention to our budget deficit. We never cared about our current account deficit. We just kept moving on towards a cliff with the hopes that the cliff is not that high when we drop off of it.
Pakistan has never had structural reforms. We have always had ad hoc policies. Let it be any government. Civil or military. We only cared about making the people happy temporarily. And the naïve people always believed in their leaders because of the lack of financial knowledge. And the ones who had the financial knowledge and know how, usually got cozy positions in the governments and kept their mouths sealed and put their self-interest above the interest of the country.
And the price is being paid by the common man of today. We need reforms in every sector. Otherwise this government will also prove to be like all others in the past. And reforms are brought by bringing about unpopular measures. Reforms are brought by not caring about getting elected again but caring about making the lives of the people better.
I see every little reforms so far. I still hope that reforms are brought about. Because without reforms, we will be again standing at the same cross roads of economic havoc 5, 100 or 20 years from today.
Dollar was at Rs 10 when I moved to America as a young teenager. Dollar was at Rs 104 when I moved back to Pakistan as an adult after decades. Dollar is at Rs 165 today as I am living here now. The only thing that has constantly changed is the dollar price against our currency. In these past 30 years, nothing else has changed when it comes to reforms. Same political faces and same disastrous economic policies.