What is actually behind currency depreciation?

Hamid Khan

Islamabad

This is apropos a Business Recorder op-ed “Reducing C/A deficit” carried by the newspaper on July 26, 2022. The writer, Dr Hafiz A Pasha, has made a very important point in relation to various countries’ currency woes. According to him, “Other countries in similar situation like Turkey, Sri Lanka and Argentina have seen the number of their national currency units to buy a US dollar rise by 107, 85 and 35 percent respectively in 2021-22. Some of this has been due to the appreciation in the value of the dollar which has had a global impact on currencies.”

In my view, however, what is equally important to note is the fact that India’s rupee is likely to test new lows in coming weeks and months. High energy prices have exacted a toll on India’s currency as well. The India’s rupee has declined more than five percent against the US dollar year-on-year (yoy). In the last week of June 2022, Washington Post made a very impressive point about the preponderance of US dollar. An analysis ‘In the Oil Market, the Strong Dollar Is the World’s Problem,” Javier Blas said, among other things, that “. … The greenback is hovering at a 20-year high against its fellow major currencies, creating a huge problem for everyone outside America buying dollar-dominated goods. And no commodity is more important than crude oil”. The foregoing, therefore, clearly explains the currency woes of Pakistan as well. We must never overlook the fact that Pakistan is a net importer. I think Dr Pasha, an erudite and venerable economist, seems to have missed this key point.