Unless the Pakistan government settles an issue of continuous depreciation of Pakistani rupee, it will be left on the edge of an unprecedented external debt default. On average 66% of the total increase in external debt is caused by unfavourable movement of exchange rate since 2007-08.
Pakistan badly needs fresh foreign money for boosting foreign exchange reserves and to ease down pressure on Pak rupee. To avoid a full-blown crisis and a collapse of the currency, the assistance of a $6.6 billion loan from the IMF may be a ray of hope but at the cost of crowding out of the private sector, because in order to fulfill the conditions set by the IMF, the government hiked the interest rates.
The flexible exchange rate that prevails in Pakistan increases uncertainty for traders both internally and externally and also has a hash effect on a volume of foreign debt which might eventually lead to the depression and unwanted inflation.
In Pakistan external loans are contracted in various currencies but disbursements are effectively converted into Pak Rupee. As Pak Rupee is not an internationally traded currency, the other currencies are bought and sold via selling and buying of US Dollar. Hence, currency
This article was originally published at: The Express Tribune
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.