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The Rupee And The Dollar: An Introduction

"Increasing the supply of dollars is not a short-term process. It takes a longer-term view of the economy with the aim of achieving global competitiveness," writes Uzair bin Farid

Uzair bin Farid by Uzair bin Farid
June 16, 2022
in Citizens' Voice, Economy, Perspective
The Rupee And The Dollar: An Introduction
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The markets in which the dollar is traded work like any other markets of goods and services. The determination of price takes place in the same way that it does in any other market. That underlying principle is that of demand and supply. When the demand for dollars increases, it adds value to the limited numbers of greenbacks being held by the people in the market. Thus, the price of the dollar is pushed up. As soon as the supply of dollar is eased through any means possible, there is seen a break or a step in the inevitable flight of the dollar.

Here one must ask the question as to why the dollar’s flight is inevitable. Why can’t it be stemmed or even brought down against the rupee? Well, the answer to this question is very simple. Referring again to the demand and supply principle, it is easy to show that in order to keep the dollar price stable in the market, it is important to pump as many dollars in the market as are needed. If the demand and supply of dollars in the market is equal, the price of the dollar will remain stable at the initial price where equalisation of demand and supply took place. However, in order to bring the price of a dollar down against the rupee, there is only one way, and that is to increase the supply of dollars in the markets compared to the actual demand.

The supply of dollars cannot be increased into the market just like that. For one, the State Bank of Pakistan cannot print dollars on its own, because it is not our currency in the first place. Second, if the State Bank prints its own currency i. e. the rupee, to buy dollars, it risks increasing the money supply in the market which causes inflation. Even if the State Bank does that it can only buy limited numbers of dollars from the local markets. In order to buy unlimited number of dollars it will have to resort to international markets where Pakistani currency is of no use.

How then, Pakistan can successfully increase its supply of dollars so as to outmatch the demand? The answer is very simple; increased exports, increased remittances, limited imports, an end to debt-driven economy and alternate sources for buying goods at cheaper rates.

One reason that over the years Pakistan had to decommission smaller bank notes is that Pakistani currency lost its purchasing power. We no longer have paisas and anas. Whereas in the United States there is still trade being done in cents, nickels, quarters and dimes. A 5,000-rupee note is the highest currency note that is in circulation in Pakistan, whereas in United States it is $100. It tells a lot about the relative values of the currencies.

Increasing the supply of dollars is not a short-term process. It takes a longer-term view of the economy with the aim of achieving global competitiveness. Global competitiveness is not possible without a concerted effort into research and development. When Pakistani industry will be able to produce cheaply the goods which are innovative, in the way that Apple products are, and serve the needs of the majority, only then will it able to bring down dollar against the rupee. It is very simple to understand this.

If you want to understand what a computer is, first you will have to have a computer, somehow, to understand its function. That you can only buy from the international markets because you yourself are not skilled enough to make a computer. Now when you want to make a computer yourself, you need technical knowledge and manufacturing capital to make it. Again, you do not have access to those because you belong to the dregs of the dregs unfortunately. In order to buy those, again you have to go to the international markets. Some parts of a computer are so expensive and difficult to manufacture that you cannot help but rely on international suppliers, like, for example, the semiconductor chips. Thus, the technological jump that is needed to enter the big league is not possible without first having basic knowledge. That basic knowledge and production base is not possible to set up without multi-billion investments in relevant areas, and those too in dollars. Therefore, first it is essential to have enough dollars to invest enough so that in the end technological jump like that of China can be made possible.

It all starts from setting a goal. If the goal is to keep the dollar stable against a rupee then equal amounts of dollars are to be supplied into the market as and when the demand arises. This can also be done by relying on debts from various sources. However, if the goal is to bring down the value of 1 dollar to match the value of a rupee, then there is only one way. And that is to strengthen the economy of the country to such an extent that the rupee derives its value from the strength of the economy.

The determination of price takes place in the market through the mechanism of demand and supply. Demand can be increased inordinately by wishing for anything that can be bought in the international markets. Increasing the supply is a tricky business. It depends on the strength of the economy. Economy is strengthened by investing in human and physical capital. Investment in human and physical capital cannot be done because in order to become globally competitive, those skills and manufacturing capital that is needed for the former can only be bought in the international markets. In order to buy in the international markets again dollars are needed. We reach back to square one.

It is, therefore, important that those areas are highlighted where public-private investments will yield longer-term dividends of employment, supplies of dollars and growth. Agriculture is one such area. The Netherlands with its small area has become a net exporter of food to the whole of Europe. Pakistan with better geography, human capital, land and water resources can feed the whole of China if state-led progress is made in the development of agriculture. Climate change and the depletion of water resources make it important that drip technology is used to conserve the limited supply of water. This will allow people to have employment opportunities in their hometowns without the need for travelling to urban metropolises like the Karachi. Those who have already travelled to the big cities will be incentivized to move back. Thus a lowering of burden will take place from such big human communities.

Even if short-term measures like IMF bailouts are successfully negotiated, the long-term threat of dollar depletion will continue to lurk in the background. Because the lack of political will on the part of outgoing governments to keep the country steady for the incoming governments is totally lacking. Initially it was done by that pseudo-economist Ishaq Dar who unwittingly took the economy for no more than an accounting technique. This time around it was the Imran Khan regime who did not shy from putting the economy in peril in order to benefit his own political project. No one single person who is part of the ruling establishment will be affected by the prices hikes of the essential fuels. Not Miftah, not the Sharifs, not the Zardaris, Khans and not the Generals and the judges. It is always the poor. This time too, they are going to bear the brunt of the egoistic decisions of Imran Khan. When Imran Khan realised that his government was going down, he decided to sink the whole ship. This type of callous behaviour is not emblematic of Imran Khan only. Other political parties could not learn the lesson, too. They poked the bear while it was already injured, and all hell broke loose. If only they had waited for another year, they would have gotten their chance. But they were “fazed” by the politically significant November approaching and could not afford to do nothing. In the end there are skeletons in every cupboard, and no one seems to be able to grasp the gravity of the situation.

To conclude there is only one thing that is going to increase the supply of dollars and save us from impending calamity: a change in behaviours, attitudes, and long-term policy planning to invest in those areas which increase the strength and resilience of the economy. It will work only if global competitiveness is kept in mind as the ultimate goal. If global competitiveness is achieved, only then the market share for profitable goods can be secured. Or else we might as well be praying for Providence to intervene so that we discover oil worth billions of dollars underneath our country. Whichever happens first.

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Tags: PakistanindustryfinancefuelmarketsExportsenergyexchangedollarsubsidyratepricemanufactureIMFforeignrupee
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Uzair bin Farid

Uzair bin Farid

Writer—Economist—Poet—Tweets @uzairbinfarid1

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Comments 1

  1. Naya Pakistani says:
    8 months ago

    Good analysis and diagnosis. Solution is only that there is a national understanding between politicians, public and establishment and a clarity that we ought to work competitively for a few decades and there are no short-cuts.

    A misconception that most commentators have is that “monetarist” is a known economic school of thought and Ishaq Dar is an example. All successful nations to go around the twin deficit Vs growth conundrum by practising this strategy for a short period.

    What went wrong as always was that our establishment found a successful political government unpalatable and jumped from political engineering to economic engineering in 2017 and chased the finance minister out of the country. It’s evident from contemporary journalism (“Dar & General” by Khurram Husain in Dawn). Hence all the gains made were usurped in non-developmental activities. If regime change was not forced and political process has followed its natural course a good ten year solid growth and development under same economic regime would have followed and we would have now been able to face global shocks much better. Although surely at some point Dar’s “monetarist” policy would have eased into Keynesian.

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