Pakistan is facing a huge eco­nomic crisis due to currency depreciation which could become a worst-case scenario if not dealt with suitable economic policies. The devaluation of the Pakistani rupee in comparison to the US dol­lar is becoming an everlasting risk for Pakistan’s economy, making the economy vulnerable. The ongo­ing situation is becoming a major cause of distress for the economy in terms of both micro and macro perspectives. What will be the con­sequences of PKR depreciation on the economy of Pakistan?

Currency depreciation is an un­official increase in the exchange rates due to the demand and sup­ply of currency. This happens when a country is following the floating exchange rate system. The exchange rate means the value of one currency for the purpose of conversion to another. The eco­nomic situation in Pakistan due to the rise of the US dollar is a mat­ter of prime importance because the rupee depreciation against the dollar will have grave consequenc­es. Nowadays, currency deprecia­tion is one of the most prominent issues in Pakistan and it has al­ways created severe problems for the economy of Pakistan.

There are two levels of econo­my, micro level, and macro level. The micro-level of the economy includes individual and business decisions, while the macro-level analyzes the decisions made by countries and governments. Mi­cro-level focuses on supply and demand, and other forces that de­termine price levels, making it a bottom-up approach. Investors can use microeconomics in their investment decisions. The macro-level takes a top-down approach and looks at the economy, de­termining its course and nature. Macroeconomics is an analytical tool used to craft economic and fiscal policy.

There are many issues at the mi­cro as well as the macro level of the economy which Pakistan is facing due to the increase in the exchange rates of the US dollar. The issues that Pakistan is facing at the macro level include unem­ployment, high-interest rates, in­flation, and worsening GDP while the issues at the micro level are poverty, monopoly, and volatile prices. Pakistan is an importer of fertilizers, oil, food items, ma­chinery, and many raw materials. In the current scenario, the prices of commodities are increasing at a greater pace due to the increase in the prices of imported goods.

The PKR depreciation will also affect the economy by increasing the cost of doing business which in turn will lower the business competitiveness in the interna­tional market. Exchange rate fluc­tuations will have severe conse­quences like impacts on interest rates, production levels, prices, and employment opportunities. Due to the greater exchange rates and currency depreciation, more loans will be taken from the IMF to return the previous ones and then, the country will have to convert a huge amount of PKR into USD to return those loans.

The exports of Pakistan will be increased due to the devaluation of the currency because a great­er number of resources will be exported at a lower price. Simi­larly, the increase in prices of im­ports will also harm the economy as imports will be bought at high­er prices. A significant danger is that by increasing the price of im­ports and stimulating greater de­mand for domestic products, de­valuation can exaggerate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.

Pakistan is dealing with sever­al economic issues due to the de­valuation of PKR. It demonstrates that Pakistan is included in the list of developing countries. The PKR depreciation is forcing Pakistan’s Gross Domestic Product (GDP) to­wards a downfall. This is because of increased prices of imported goods and increased exports at lower prices. GDP is the total amount of goods and services produced in an economy. Due to the increase in ex­ports at lower prices and higher prices of imports, GDP is falling at an accelerated rate. The economy is suffering due to the imbalance be­tween imports and exports.

The increased exports will also cause an imbalance in the econom­ic structure and a rapid increase in aggregate demand. Aggregate demand is a macroeconomic term that represents the total demand for goods and services at any giv­en price level in a particular peri­od. When the goods are exported at a much higher rate with lower prices, there becomes a shortage of those goods in the country. So, it is quite obvious that a faster ex­port rate will increase the aggre­gate demand for the economy of Pakistan.

The long terms consequences of currency devaluation could be brutal for Pakistan if this issue is not given due importance right now. Pakistan should learn from the example of Sri Lanka and how its economy has been devastat­ed. The inflation rate in Sri Lan­ka is also very high and obviously, this is due to the devaluation of its currency. The government should pay heed to this threatening issue of the continuous devaluation of PKR. If proper policies are not ad­opted to curb this issue of PKR de­preciation, Pakistan will face the same problems which Sri Lanka is facing for quite a time now.

HAFIZ BILAL WASEEM SATTI,

Islamabad