DEVALUATION OF CURRENCY

TABLE OF CONTENTS
S. No.Description
ACKNOWLEDGEMENT
REFACE
CURRENCY
!.! What Is Currency
!." Pakistani Currency
!.# Role Of SBP
DEVALUATION
".! Introduction
"." Devaluation In Modern Economies
".# Tyes Of E!chan"e Rate Systems
".$ Country Devaluation
".% Effects Of Devaluation
E&C'ANGE RATE
#.! SBP#s Policy $%out Currency
#." E!chan"e Rates

FACTORS CAUSING DEVALUATION OF KR
$.! Balance Of Payment
$." Pakistan#s Balance Of Payment
$.# Measures &or Correctin" $dverse BoP
$.$ Su""estions To Imrove BoP
$.% Deletin" &orei"n Reserves
$.( Decreased Credit Ratin"
$.)
Law And Order Situation
$.*
Situation In 'orthern Pakistan
$.+
Proosed Remedy
$.!,
Domestic Issues
GLOBAL ISSUES
%.!
O(ER(IEW
%."
S)BPRIME
%.#
)S* W$R O' TERROR* &OOD CRISIS $'D MORE
%.$
DO++$R $'D C,I'$
CONCLUSION
REFRENCES
A-str.ct
The urose of this study is to analy-e the shar dro in the value of P.R/
The international crisis follo0in" the events of Setem%er 11* 2331 and the ensuin"
)S attack on $f"hanistan cau"ht Pakistan in the crossfire* came 0ith serious
economic and olitical conse4uences for the country/ With increasin" num%er of
refu"ees crossin" the %order* adverse Balance of Payments and deterioratin" la0 and
order situation* Pakistan is loosin" the %attle to maintain the stren"th of its currency
0hich is devaluatin" at a helless rate/
&ast deletin" forei"n currency reserves 0hich continue to fall at 5633 to
5733 million er month* fli"ht out caital estimated 583 million er day* hu"e "a
%et0een imort and e!ort %ill* mismana"ement in rivati-ation rocess* do0n"raded
credit ratin" %y International Ratin" $"ency Standard 9 Poors and Moody#s*
inflation rate floatin" more than 2: ercent* heavy "overnment %orro0in" to cover a
%ud"et deficit and 5:33 million euro %ond de%t o%li"ation due in &e%ruary are the
noticea%le factors in the erosion of Pak ruee/
This study ar"ues that internal as 0ell as e!ternal factors are resonsi%le for
this nosedive/
CURRENCY
DEFINITION
/!0

$ c1rrenc2 is a unit of e!chan"e* facilitatin" the transfer of "oods and;or services/ It
is one form of money* 0here money is anythin" that serves as a medium of e!chan"e*
a store of value* and a standard of value/ Currencies are the dominant medium of
e!chan"e/ Coins and aer money are %oth forms of currency/
RUEE
/!0

The r1pee <si"n= > code= KR? is the currency of Pakistan/ The issuance of the
currency is controlled %y the State Bank of Pakistan/ The most commonly used
sym%ol for the ruee is Rs* used on receits 0hen urchasin" "oods and services/ In
Pakistan* the ruee is referred to as the @ruees@* @ruaya@ or @ruaye@/ $s standard in
Indian En"lish* lar"e values of ruees are counted in terms of thousands* lakh <133
thousand* in di"its 1*33*333? and crore <13 million* in di"its 1*33*33*333?/
.3ist.nir1pee
4567 /Ur810
1333Aruee note Coins of various denominations
ISO $"!) Co8e P.R
User/s0 Pakistan
In9:.tion 2:B
So1rce Federal Bureau of Statistics* Setem%er 2336
S1-1nit 1;133 aisa
S2;-o:
Coins &re4/ used 1* 2* : ruees
B.n3notes &re4/ used 13* 23* :3* 133* :33* 1333* :333 ruees
Centr.: -.n3 State Bank of Pakistan
We-site 000/s%/or"/k
'ISTORY
The ori"in of the 0ord @ruee@ is found in the Sanskrit 0ord rC or rCD* 0hich
means @silver@ in many IndoA$ryan lan"ua"es/ The Sanskrit 0ord rCyakam means
coin of silver/ The derivative 0ord RCaya 0as used to denote the coin introduced %y
Sher Shah Suri durin" his rei"n from 1:E3 to 1:E: CE/
The Pakistani ruee 0as ut into circulation after the country %ecame indeendent
from the British RaF in 17E8/ &or the first fe0 months of indeendence* Pakistan used
Indian coins and notes 0ith @Pakistan@ stamed on them/ 'e0 coins and %anknotes
0ere issued in 17E6/ +ike the Indian ruee* it 0as ori"inally divided into 1G annas <
HI?* each of E ice <JKL? or 12 ie <MNL?/ The currency 0as decimali-ed in 17G1* 0ith
the ruee su%divided into 133 ice* renamed <in En"lish? aise <sin"ular aisa? later
the same year/ ,o0ever* coins denominated in aise have not %een issued since 177E
COINS
In 17E6* coins 0ere introduced in denominations of 1 ice* O* 1 and 2 annas* P* O
and 1 ruee/ 1 ie coins 0ere added in 17:1/ In 17G1* coins for 1* : and 13 ice 0ere
issued* follo0ed later the same year %y 1 aisa* : and 13 aise coins/ In 17GQ* 13 and
2: aise coins 0ere introduced* follo0ed %y 2 aise the ne!t year/ 1 ruee coins 0ere
reintroduced in 1787* follo0ed %y 2 ruees in 1776 and : ruees in 2332/ 2 aise
coins 0ere last minted in 178G* 0ith 1 aisa coins ceasin" roduction in 1787/ The :*
13* 2: and :3 aise all ceased roduction in 177E/There are t0o variations of 2
ruee coins* most have clouds a%ove the Badshahi MasFid %ut many donRt have/ This
is noted %y too less eole/
C1rrent:2 Circ1:.tin< Coins
Depictio
n /Front0
Depictio
n /B.c30
V.:1e Ye.r
in Use
Co;positio
n
Front
I::1str.tio
n
B.c3
I::1str.tion
Re/ 1
<Old
(ersion
?
17E6 A
Presen
t
CuroAnickel Crescent
and Star
&loral
Wreath
Re/ 1
<'e0
(ersion
?
1776 A
Presen
t
Bron-e SuaidAeA
$-am*
Muhamma
d $li
Tinnah
,a-rat +al
Shah%a-
Salandar
Mausoleum
* Seh0an
Shareef
Rs/ 2 1776 A
Presen
t
Brass Crescent
and Star
Badshahi
MasFid*
+ahore
Rs/ : 2332 A
Presen
t
CuroAnickel Crescent
and Star
: in a
Penta"on
BANKNOTES
In 17E8* rovisional issues of %anknotes 0ere made*
consistin" of "overnment of India and Reserve Bank of
India notes for 1* 2* :* 13 and 133 ruees overrinted
0ith the te!t @Uovernment of Pakistan@ in En"lish and
)rdu/ Re"ular "overnment issues commenced in 17E6
in denominations of 1* :* 13 and 133 ruees/ The
"overnment continued to issue 1 ruee notes until the
1763s %ut other note issuin" 0as taken over %y the State
Bank in 17:Q* 0hen 2* :* 13 and 133 ruees notes 0ere issued/ Only a fe0 2 ruees
notes 0ere issued/ :3 ruees notes 0ere added in 17:8* 0ith 2 ruees notes
reintroduced in 176:/ In 176G* :33 ruees notes 0ere introduced* follo0ed %y 1333
ruees the ne!t year/ 2 and : ruees notes 0ere relaced %y coins in 1776 and 2332/
23 ruees notes 0ere added in 233:* follo0ed %y :333 ruees in 233G/
$ll %anknotes other than the 1 and 2 ruees feature a ortrait of Muhammad $li
Tinnah on the o%verse alon" 0ith 0ritin" in )rdu/ The reverses of the %anknotes vary
in desi"n and have En"lish te!t/ The only )rdu te!t found on the reverses is the )rdu
translation of the Prohetic ,adith* @Seekin" honest livelihood is 0orshi of Uod/@
The %anknotes vary in si-e and colour* 0ith lar"er denominations %ein" lon"er than
smaller ones/ $ll contain multile colours/ ,o0ever* each denomination does have
one colour 0hich redominates/ $ll %anknotes feature a 0atermark for security
uroses/ On the lar"er denomination notes* the 0atermark is a icture of Tinnah*
0hile on smaller notes* it is a crescent and star/ Different tyes of security threads are
also resent in each %anknote/
B.n3notes -e9ore t=e ",,% Series
I;.<e
V.:1e
Di;ension
s
M.in
Co:o1r
Descriptio
n > Re?erse
St.t1s
O-?erse Re?erse
Re/ 1
7: V GG
mm
Bro0n
Tom% of
Muhammad
I4%al in
+ahore
'o lon"er
in
Circulation
Rs/ 2
137 V GG
mm
Purle
Badshahi
MasFid in
+ahore
Rs/ :
128 V 8Q
mm
Bur"und
y
.hoFak
Tunnel in
Balochistan
Rs/
13
1E1 V 8Q
mm
Ureen
MohenFoA
daro in
+arkana
District
'o lon"er
rinted A
Still in
Circulation
Rs/
:3
1:E V 8Q
mm
Purle
and Red
$lam"iri
Uate of the
+ahore &ort
in +ahore
'o lon"er
rinted A
Still in
Circulation
Rs/
133
1G: V 8Q
mm
Red and
Oran"e
Islamia
Colle"e in
Pesha0ar
'o lon"er
rinted A
Still in
Circulation
Rs/
:33
18: V 8Q
mm
Ureen*
tan* red*
and
The State
Bank of
Pakistan in
oran"e Islama%ad
Rs/
1333
18: V 8Q
mm
Blue
Tom% of
Tahan"ir in
+ahore
'o lon"er
rinted A
Still in
Circulation
The State Bank has started a ne0 series of %anknotes* hasin" out the older desi"ns
for ne0* more secure ones/
",,% Series
I;.<e
V.:1e
Di;ension
s
M.in
Co:o1r
Descriptio
n > Re?erse
D.te o9
iss1e O-?erse Re?erse
Rs/ :
11: ! G:
mm
Ureenis
h Urey
U0adar
ort* 0hich
is a me"a
roFect in
Balochistan
<Pakistan?
Tuly 36*
2336
Rs/ 13
11: V G:
mm
Ureen
Ba% ul
.hy%er
0hich is the
entrance to
the .hy%er
Pass*
.hy%er
$"ency*
&$T$
May 28*
233G
Rs/ 23
12Q V G:
mm
Bro0n
MohenFoA
daro in
+arkana
District
$u"ust
1Q* 233:
Rs/ 23
<RevisedW
?
12Q V G:
mm
Oran"e
Ureen
MohenFoA
daro in
+arkana
District
March 22*
2336
Rs/ :3
1Q1 ! G:
m/m/
Purle
.2* second
hi"hest
mountain of
0orld in
northern
areas of
Pakistan
Tuly 36*
2336
Rs/ 133
1Q7 V G:
mm
Red
SuaidAeA
$-am
Residency
in Xiarat
'ovem%er
11* 233G
Rs/ :33
1E8 V G:
mm
Rich
Dee
Ureen
Badshahi
MasFid in
+ahore
Rs/ 1333
1:: V G:
mm
Dark
%lue
Islamia
Colle"e in
Pesha0ar
&e%ruary
2G* 2338
Rs/ :333
1GQ V G:
mm
Mustard
&aisal
Mos4ue in
Islama%ad
May 28*
233G
<WRecently the State Bank revised the Rs/23;A %anknote* after comlains of its
similarity to the Rs/:333;A* 0hich caused a lot of confusion and financial losses* 0hen
eole "ave out Rs/:333;A notes* thinkin" them to %e Rs/23;A notes?
DEVALUATION
DEFINITION
/!@"0

De?.:1.tion is a reduction in the value of a currency 0ith resect to other monetary
units/ In common modern usa"e* it secifically imlies an official lo0erin" of the
value of a countryRs currency 0ithin a fi!ed e!chan"e rate system* %y 0hich the
monetary authority formally sets a ne0 fi!ed rate 0ith resect to a forei"n reference
currency/ In contrast* /c1rrenc20 8epreci.tion is most often used for the unofficial
decrease in the e!chan"e rate in a floatin" e!chan"e rate system/ The oosite of
devaluation is called re?.:1.tion/
Depreciation and devaluation are sometimes used interchan"ea%ly* %ut they al0ays
refer to values in terms of other currencies/ Inflation* on the other hand* refers to the
value of the currency in "oods and services <related to its urchasin" o0er?/
DEVALUATION IN MODERN ECONOMIES
Present day currencies are usually fiat currencies 0ith insi"nificant inherent value/
The value of currency is determined %y the interlay of money suly and money
demand/ $s some countries hold floatin" e!chan"e rates* others maintain fi!ed
e!chan"e rate olicy a"ainst the )nited States dollar or other maFor currencies/ These
fi!ed rates are usually maintained %y a com%ination of le"ally enforced caital
controls or throu"h "overnment tradin" of forei"n currency reserves to maniulate the
money suly/ )nder fi!ed e!chan"e rates* ersistent caital outflo0s or trade
deficits may lead countries to lo0er or a%andon their fi!ed rate olicy* resultin" in
devaluation <as ersistent surluses and caital inflo0s may lead them to0ards
revaluation?/
TYES OF E&C'ANGE RATE SYSTEMS
/!@"0

FiAe8 EAc=.n<e R.te S2ste;
$ fi!ed e!chan"e rate* sometimes called a e""ed e!chan"e rate* is a tye of
e!chan"e rate re"ime 0herein a currencyRs value is matched to the value of another
sin"le currency or to a %asket of other currencies* or to another measure of value*
such as "old/
$ fi!ed e!chan"e rate is usually used to sta%ili-e the value of a currency* visAaAvis the
currency it is e""ed to/ This facilitates trade and investments %et0een the t0o
countries* and is esecially useful for small economies 0here e!ternal trade forms a
lar"e art of their UDP/
Un8er . 9iAe8 eAc=.n<e r.te s2ste;@ 8e?.:1.tion .n8 re?.:1.tion .re
o99ici.: c=.n<es in t=e ?.:1e o9 . co1ntr2Bs c1rrenc2 re:.ti?e to ot=er c1rrencies.
Bot= 8e?.:1.tion .n8 re?.:1.tion c.n -e con81cte8 -2 po:ic2;.3ers@ 1s1.::2
;oti?.te8 -2 ;.r3et press1res.
The charter of the International Monetary &und <IM&? directs olicymakers to
avoid @maniulatin" e!chan"e rates///to "ain an unfair cometitive advanta"e over
other mem%ers/@
F:o.tin< EAc=.n<e R.te S2ste;
)nder a floatin" e!chan"e rate system* market forces "enerate chan"es in the value of
the currency* kno0n as currency dereciation or areciation/ $ 9:o.tin< eAc=.n<e
r.te or a fle!i%le e!chan"e rate is a tye of e!chan"e rate re"ime 0herein a
currencyRs value is allo0ed to fluctuate accordin" to the forei"n e!chan"e market/ $
currency that uses a floatin" e!chan"e rate is kno0n as a floatin" currency/ The
oosite of a floatin" e!chan"e rate is a fi!ed e!chan"e rate/
Many economists think that* in most circumstances* floatin" e!chan"e rates
are refera%le to fi!ed e!chan"e rates/ They allo0 the damenin" of shocks and
forei"n %usiness cycles/ ,o0ever* in certain situations* fi!ed e!chan"e rates may %e
refera%le for their "reater sta%ility and certainty/ This may not necessarily %e true*
considerin" the results of countries that attemt to kee the rices of their currency
@stron"@ or @hi"h@ relative to others* such as the ). or the Southeast $sia countries
%efore the $sian currency crisis/
In cases of e!treme areciation or dereciation* a central %ank 0ill normally
intervene to sta%ili-e the currency/ Thus* the e!chan"e rate re"imes of floatin"
currencies may more technically %e kno0n as a ;.n.<e8 9:o.t/ $ central %ank
mi"ht* for instance* allo0 a currency rice to float freely %et0een an uer and lo0er
%ound* a rice @ceilin"@ and @floor@/ Mana"ement %y the central %ank may take the
form of %uyin" or sellin" lar"e lots in order to rovide rice suort or resistance* or*
in the case of some national currencies* there may %e le"al enalties for tradin"
outside these %ounds/
UNDER W'AT CIRCUMSTANCES MIG'T A
COUNTRY DEVALUEC
When a "overnment devalues its currency* it is often %ecause the interaction of
market forces and olicy decisions has made the currencyRs fi!ed e!chan"e rate
untena%le/ In order to sustain a fi!ed e!chan"e rate* a country must have sufficient
forei"n e!chan"e reserves* often dollars* and %e 0illin" to send them* to urchase
all offers of its currency at the esta%lished e!chan"e rate/ When a country is una%le or
un0illin" to do so* then it must devalue its currency to a level that it is a%le and
0illin" to suort 0ith its forei"n e!chan"e reserves/
$ key effect of devaluation is that it makes the domestic currency cheaer relative to
other currencies/ There are t0o imlications of devaluation/ &irst* devaluation makes
the countryRs e!orts relatively less e!ensive for forei"ners/ Second* the devaluation
makes forei"n roducts relatively more e!ensive for domestic consumers* thus
discoura"in" imorts/ This may hel to increase the countryRs e!orts and decrease
imorts* and may therefore hel to reduce the current account deficit/
There are other olicy issues that mi"ht lead a country to chan"e its fi!ed e!chan"e
rate/ &or e!amle* rather than imlementin" unoular fiscal sendin" olicies* a
"overnment mi"ht try to use devaluation to %oost a""re"ate demand in the economy
in an effort to fi"ht unemloyment/ Revaluation* 0hich makes a currency more
e!ensive* mi"ht %e undertaken in an effort to reduce a current account surlus*
0here e!orts e!ceed imorts* or to attemt to contain inflationary ressures/
EFFECTS OF DEVALUATION
/#0

$ si"nificant dan"er is that %y increasin" the rice of imorts and stimulatin" "reater
demand for domestic roducts* devaluation can a""ravate inflation/ If this haens*
the "overnment may have to raise interest rates to control inflation* %ut at the cost of
slo0er economic "ro0th/
$nother risk of devaluation is sycholo"ical/ To the e!tent that devaluation is vie0ed
as a si"n of economic 0eakness* the credit0orthiness of the nation may %e
Feoardi-ed/ Thus* devaluation may damen investor confidence in the countryRs
economy and hurt the countryRs a%ility to secure forei"n investment/
$nother ossi%le conse4uence is a round of successive devaluations/ &or instance*
tradin" artners may %ecome concerned that devaluation mi"ht ne"atively affect their
o0n e!ort industries/ 'ei"h%orin" countries mi"ht devalue their o0n currencies to
offset the effects of their tradin" artnerRs devaluation/ Such @%e""ar thy nei"h%or@
olicies tend to e!acer%ate economic difficulties %y creatin" insta%ility in %roader
financial markets/
Since the 17Q3s* various international or"ani-ations such as the International
Monetary &und <IM&? have %een esta%lished to hel nations coordinate their trade and
forei"n e!chan"e olicies and there%y avoid successive rounds of devaluation and
retaliation/ The 178G revision of $rticle I( of the IM& charter encoura"es
olicymakers to avoid @maniulatin" e!chan"e rates///to "ain an unfair cometitive
advanta"e over other mem%ers/@ With this revision* the IM& also set forth each
mem%er nationRs ri"ht to freely choose an e!chan"e rate system/
To summari-e
1/ $ devaluation of the e!chan"e rate 0ill make e!orts more cometitive and aear
cheaer to forei"ners/ This 0ill increase demand for e!orts
2/ Imorts 0ill %ecome more e!ensive/ This 0ill reduce demand for imorts
Q/ $DY ZAM Therefore hi"her e!orts and lo0er imorts 0ill increase $D
,i"her $D is likely to cause hi"her Real UDP and inflation/
E?.:1.tion
The si-e of this increase deends uon factors such as=
a? Sare caacity in the economy
%? Other determinants of $D
E/ Inflation is likely to occur %ecause=
i? Imorts are more e!ensive
ii? $D is increasin"
iii? With e!orts %ecomin" cheaer manufacturers may have less incentive to cut
costs and %ecome more efficient
E?.:1.tionD
The effect on inflation 0ill deend on other factors such as
iv? Sare caacity in the economy
v? Do firms ass increased imort costs onto consumers
vi? Imort rices are not the only determinant of inflation/
Other factors affectin" inflation such as 0a"e increases may %e imortant
:/ There is likely to %e an imrovement in the current account %alance of ayments/
This is %ecause e!orts are increasin" and imorts are fallin"/
NOTE:
AD = Aggregate Demand
X= Exports
= !mports
E&C'ANGE RATE
The Pakistani ruee dereciated a"ainst the )S dollar until the turn of the century*
0hen PakistanRs lar"e currentAaccount surlus ushed the value of the ruee u
versus the dollar/ PakistanRs centr.: -.n3 then sta%ili-ed %y lo0erin" interest
rates and %uyin" dollars* in order to reserve the countryRs e!ort
cometitiveness/ The year 2336 has %een termed as disastrous year for the
ruee as so far <u to $u"ust 2336? it has lost 2QB of its value since Decem%er*
2338 to a record lo0 of 61/E a"ainst )S Dollar/ The maFor reasons for this
dereciation are on"oin" olitical crisis* increased current and trade accounts
deficits and risin" militancy in the NWF and FATA areas/
In recent fe0 days* there 0as a record increase in the rice of )S Dollar a"ainst
Pakistani Ruee/ &e0 months %ack* )S Dollar 0as tradin" at a%out G3 Ruees in the
InterABank Market/
<E?
In the month of $ril* 2336* Pakistani Ruee 0as at a GE ruee level a"ainst )S
Dollar/ If 0e "o further %ack fe0 months* then 0e 0ill find )S Dollar at G3 ruee in
the InterABank Market/
In the ast 13 or so months* the rate of )S Dollar has increased almost Q3B a"ainst
the Pakistani Ruee/ The rate of Pakistani Ruee reached 61/E ruees in the oen
market on 1G
th
of Octo%er* 2336/ This 0as the hi"hest ever value "ained %y )S Dollar
a"ainst Pakistani Ruee in the history of Pakistan/
$n increased )S Dollar rate means 0eakened Pakistani currency/ When the currency
is 0eakened* the overall economy suffers/ Pakistan#s economy is already in a %ad
situation/ The 0orld 0ide %ad economic situation has made thin"s even 0orse for
Pakistan and other third 0orld countries/
State Bank of Pakistan is tryin" its %est to try to imrove the economic situation %y
sta%ili-in" the )S Dollar rate/ State Bank recently umed in :3 Million Dollars in
the oen market in order to sto the fast increasin" rice of )S Dollar a"ainst Pak
Ruee/
&or the ast t0o days* value of Pak currency has recovered a little %it in %oth the
InterABank Market as 0ell as in the oen market/ ,o0ever* a 4uestion raises here=
That is* is this an artificial recovery of Pak Currency or the economy really is
imrovin"[
State Bank of Pakistan took different stes in order to revent further dro in Pak
currency/ +et#s hoe Pakistan economy and 0orld#s economic situation "ets %etter/
NOTED The fi"ures are till $u"ust 2336/
RUEE .n8 OT'ER CURRENCIES
/%0@ /(0

Tust around Tanuary of 2336* Ruee 0as 4uite steady at around G1 ruees to a dollar
%ut in the ast E months* the dereciation has %een alomst 2QB/ That too at a time*
0hen )S dollar is also 0eakenin" as comared to other maFor curencies of the 0orld/
&ollo0in" "rah sho0s Ruee#s one year comarison versus the )S dollar/
On M.2 "#@ ",,** O'E )nit of other currencies 0as e4ual to follo0in" num%er of
ruees=
1 $ustralian Dollar Y (%.($ Pakistani Ruees
1 Ban"ladesh Takka Y ,.++ Pakistani Ruees
1 Canadian Dollar Y (+.,+ Pakistani Ruees
1 Chinese \uan Y +.*$ Pakistani Ruees
1 Euro Y !,).)# Pakistani Ruees
1 Indian Ruee Y !.( Pakistani Ruees
1 Ira4i Dinar Y ,.,( Pakistani Ruee
1 .u0aiti Dinar Y "%).%* Pakistani Ruees
1 Saudi Rial Y !*."# Pakistani Ruees
1 Thai Baht Y ".!" Pakistani Ruees
1 )$E Dirhan Y !*.(! Pakistani Ruees
1 Xim%a%0e Dollar Y ,.,," Pakistani Ruees
&ollo0in" "rah is the %>2e.r ?ieE of Pakistani ruee versus the )S dollar/ One can
easily note the alarmin"ly shar decline in the value of Ruee in the last fe0 months/
&ollo0in" "rah sho0s Ruee#s shar decline as of $u"ust 8* 2336
EAc=.n<e r.tesD .3ist.ni r1pee /KR0 per USF!
/!"0
RATE YEARGDATE
6E/33 <1G;13;36?
81/:3 <2G;38;36?
GQ/:3 <31;3E;36?
G3/:3 <31;11;38?
G3/8: <3:;36;2338?
:6 <233E?
:8/8:2 <233Q?
:7/82Q6 <2332?
G1/7282 <2331?
:Q/GE62 <2333?
:1/73 <1777?
EE/::3 <1776?
E3/16: <1778?
Q:/2GG <177G?
Q3/7Q3 <177:?
FACTORS CAUSING T'E DEVALUATION OF KR
/*>!$0

The Pakistani Ruee is sensitive to a lot of factors 0hich have layed their share in
%rin"in" do0n its value/
$nalysts are of the vie0 that the deletin" forei"n currency reserves 0hich
continue to fall at 5633 to 5733 million er month* %ad to 0orst la0 and order
situation in the country* fli"ht out caital estimated 583 million er day* hu"e "a
%et0een imort and e!ort %ill* mismana"ement in rivati-ation rocess* do0n"raded
credit ratin" %y International Ratin" $"ency Standard 9 Poors and Moody#s*
inflation rate floatin" more than 2: ercent* 0idenin" current account deficit* heavy
"overnment %orro0in" to cover a %ud"et deficit and 5:33 million euro %ond de%t
o%li"ation due in &e%ruary are the maFor factors in the erosion of Pak ruee/ Thou"h
the dereciatin" ruee is the %i""est challen"e for Pakistan economy %ut our leaders
are %usy in Fust olitics and are least %othered like financial mana"ers to chalk out
affective olicies to ull the country out of economic mess/
+et#s take a look the maFor factors 0hich are resonsi%le for this turmoil/
BALANCE OF AYMENT
In economics* the -.:.nce o9 p.2;ents* <or BO? measures the ayments that flo0
%et0een any individual country and all other countries/ It is used to summari-e all
international economic transactions for that country durin" a secific time eriod*
usually a year/ The BOP is determined %y the countryRs e!orts and imorts of "oods*
services* and financial caital* as 0ell as financial transfers/ It reflects all ayments
and lia%ilities to forei"ners <de%its? and all ayments and o%li"ations received from
forei"ners <credits?/ Balance of ayments is one of the maFor indicators of a countryRs
status in international trade* 0ith net caital outflo0/
The %alance of ayments comrises the c1rrent .cco1nt* the c.pit.: .cco1nt* and
the 9in.nci.: .cco1nt/ @To"ether* these accounts %alance in the sense that the sum of
the entries is concetually Hero/@
The c1rrent .cco1nt consists of the <oo8s .n8 ser?ices .cco1nt* the
rimary income account and the secondary income account/
The 9in.nci.: .cco1nt records transactions that involve financial
assets and lia%ilities and that take lace %et0een residents and
nonresidents/
The c.pit.: .cco1nt in the international accounts sho0s <1? caital
transfers receiva%le and aya%le> and <2? the ac4uisition and disosal
of nonAroduced nonAfinancial assets/
C1rrent .cco1nt
The current account is the net chan"e in current assets from trade in "oods and
services <%alance of trade?* net factor income <such as dividends and interest
ayments from a%road?* and net unilateral transfers from a%road <such as forei"n aid*
"rants* "ifts* etc?/
Inco;e Acco1nt
The inco;e .cco1nt accounts mostly for investment income from dividends
and interest on credit and ayments on forei"n ta!es/
Uni:.ter.: Tr.ns9ers
Uni:.ter.: tr.ns9ers are usually conducted %et0een rivate arties/ &or
e!amle* Me!ico has a lar"e surlus of remittances from the )nited States
sent %y emi"rant 0orkers to loved ones %ack home/
Fin.nci.: .cco1nt /IMF0
$ccordin" to the IM&Rs definition* the financial account is the net c"ange in foreign
o#ners"ip of investment assets/ In economics* the term caital account has
historically %een used to refer to the IM&Rs definition of the caital and financial
accounts/
The accountin" entries in the financial account record the urchase and sale of
domestic and forei"n investment assets/ These assets are divided into cate"ories such
as forei"n direct investment <&DI?* ortfolio investment <0hich includes trade in
stocks and %onds?* and other investment <0hich includes transactions in currency and
%ank deosits?/
If forei"n o0nershi of domestic financial assets has increased more 4uickly than
domestic o0nershi of forei"n assets in a "iven year* then the domestic country has a
9in.nci.: .cco1nt s1rp:1s/ On the other hand* if domestic o0nershi of forei"n
financial assets has increased more 4uickly than forei"n o0nershi of domestic
assets* then the domestic country has a 9in.nci.: .cco1nt 8e9icit/
C.pit.: .cco1nt /IMFGecono;ics0
$ccordin" to the IM&Rs definition* the caital account @records the international flo0s
of transfer ayments relatin" to caital items@/ It therefore records a countryRs inflo0s
and outflo0s of ayments and transfer of o0nershi of fi!ed assets <caital "oods?/
E!amles of such "oods could %e factories or heavy machinery transferred to or from
a%road and so on/ Summin" u= the caital account accounts for the transfer of caital
"oods/ <source= see %ook reference list?
In economics* the term capital account usually refers to 0hat the IM& calls the
financial account and capital account* com%ined/
BALANCE OF AYMENT I KR
/*>!!0

Pakistan has a hu"e trade deficit* and our e!orts are very lo0/ The dollars
that 0e "et as a result of e!orts is small comared to the dollars 0e have to ay for
our imorts/ Bottom line* 0e need dollars* and cannot afford to let "o of 0hatever
little 0e "et in the form of our e!ort %ills/
If the ruee areciates in value a"ainst )SD* that 0ill increase our e!ort %ill
for the %uyer* and if that haens* 0e risk losin" that client to a cheaer alternate* like
China or India/
So in order to RretainR our e!orts* the state %ank maniulates the e!chan"e rate
for ruee* to ensure that it doesn#t areciate %y too much a"ainst the dollar/
PakistanRs ayments ro%lems have %een chronic since the 1783s* 0ith the
cost of oil imorts rimarily resonsi%le for the trade im%alance/ The "ro0th of
e!orts and of remittances from Pakistanis 0orkin" a%road <mostly in the Middle
East? heled Pakistan to kee the ayments deficit in check/ Since the oil sector %oom
%e"an su%sidin" in the early 1763s* ho0ever* remittances declined. Re;itt.nces
9ro; o?erse.s Eor3ers pe.3e8 .t F".+ -i::ion in !+*"G*#@ t=en 8roppe8 to F!.$
-i::ion -2 !++)G+* .n8 F! -i::ion 9ro; !+++ to ",,!. This trend esecially
accelerated durin" the Uulf War* 0hen nearly 63*333 Pakistanis in .u0ait and Ira4
lost their Fo%s/ On:2 .-o1t "%J o9 t=ese Ko-s =.8 -een re<.ine8 a year after the
end of the conflict/ Increased imorts and softer demand for PakistanRs te!tiles and
aarel in maFor markets also caused the current account deficit to further increase/
Pakistan is also a develoin" economy/ Some of the items of its e!orts are oil
seed* cotton* rice* 0ool* fish fresh* chilled fro-en* to%acco etc/ Main e!ort items are
rice and Cotton/ Pakistan also faces severe cometition in the 0orld market like other
develoin" countries/ The volume of e!orta%le "oods like cotton and rice also
deend uon climate in the country* 0hich determine "ood or %ad harvest/ It is
a"oni-in" to accet that even after "ood harvest due to favora%le climate Pakistani
"oods can fetch %etter rices only if the harvest in cometin" nations has %een %ad
due to unfavora%le climate/ Pakistan has made consistent efforts to increase and
diversify its e!orts %ut no co"ent results have so far %een achieved/ (ery recently
Pakistan has %een ayin" acute attention in the sector of Information Technolo"y/
Every endeavor is %ein" made to enrich the youn"er "eneration of the country
to0ards this sector so as to %oost soft0are e!orts and romote email commerce/
India our main rival is far ahead of Pakistan in this field/ Since the "overnment no0
"ive due reco"nition to the matter it is hoed that 0e 0ill ick u momentum very
soon/
Main items of imorts in Pakistan are etroleum and etroleum roducts*
ve"eta%le oil and fats* tea* 0heat* milk and cream etc/ The imort %ill of the country
desite %est efforts could not %e %rou"ht do0n/ Imort of etroleum and etroleum
roducts is very vital for the survival of the economy/ $ su%stantial ortion of our
forei"n e!chan"e is also utili-ed for the imort of tea/ Moreover the rices of
etroleum and its roducts revailin" in the international market have direct imact
on PakistanRs trade %alance and its %alance of ayment/ Increase in rices of
etroleum and etroleum roducts also results in corresondin" increase in numerous
items attached 0ith it chan"in" overall rice structure in the country/
Pakistan has time and a"ain devalued its currency anticiatin" that it 0ill %oost its
e!orts and 0ill make the e!orta%le "oods of the country more cometitive in the
0orld market/ But these 0ishes have failed to materiali-e so far/ Our "oods failed to
comete 0ith our nei"h%orin" countries desite the fact that their currencies 0ere
stron"er than ours/ It is stran"e to see that desite usin" the same factors of
roduction and also devaluin" our currency* our "oods fail to comete 0ith other
"oods/ T=is is so -ec.1se o1r 8o;estic inp1t cost o9 pro81ction is L1ite =i<=er
t=.n o1r nei<=-orin< co1ntries.
T=e 9.ct is t=.t const.nt incre.se in co1ntr2Ms i;ports .9ter ", percent 8ec:ine in
t=e r1pee is . 8i:e;;. t=.t =.s s1rprise8 ;ost econo;ists 0ho say Pakistan is
erhas the second country after the )S* 0hich has seen its trade deficit 0iden
irresective of the value of the currency/
It is ertinent to note that forei"n e!chan"e reserves of Pakistan are fast
deletin" and e!cet remittances from a%road other inflo0s are too lo0 to cover its
hu"e trade deficit/
It is a ity that trade is %ein" oerated in such a 0ay in Pakistan that
encoura"es imorts and discoura"es local industry/ It is claimed that Pakistan is the
only maFor cottonAroducin" and te!tileA%ased country 0here imorted clothin" and
fa%rics dominate local markets %ecause of smu""lin" menace/
It 0ould not %e out of lace to mention here that the tr.8e 8e9icit* 0hich
0idened to o?er F",.)$ -i::ion 81rin< t=e 9in.nci.: 2e.r ",,)>,** reflected a rise of
%# percent 0hen comared to the corresondin" eriod of last year/ The tr.8e
8e9icit in N1:2 only 0as !.($$ -i::ion 8o::.r and imort sur"ed to Q/:E7 %illion dollar
comared to 1/73: %illion dollar e!ort/
E&ORTS
PakistanRs e!orts stood at 518/311 %illion in the financial year 233GA2338* u
%y Q/E ercent from last yearRs e!orts of 51G/E:1 %illion/
Pakistan e!orts rice* furniture* cotton fi%er* cement* tiles* mar%le* te!tiles*
clothin"* leather "oods* sorts "oods <reno0ned for foot%alls;soccer %alls?* sur"ical
instruments* electrical aliances* soft0are* carets* and ru"s* ice cream* livestock
meat* chicken* o0dered milk* 0heat* seafood <esecially shrim;ra0ns?*
ve"eta%les* rocessed food items* Pakistani assem%led Su-ukis <to $f"hanistan and
other countries?* defense e4uiment <su%marines* tanks* radars?* salt* mar%le* ony!*
en"ineerin" "oods* and many other items/ Pakistan no0 is %ein" very 0ell reco"ni-ed
for roducin" and e!ortin" cements in $sia and MidAEast/ Startin" $u"ust 2338*
Pakistan 0ill %e e!ortin" Cement to India to fill in the shorta"e there caused %y the
%uildin" %oom/
IMORTS
PakistanRs imorts stood at 5Q3/:E %illion in the financial year 233GA2338* u
%y 6/22 ercent from last yearRs imorts of 526/:6 %illion/
PakistanRs sin"le lar"est imort cate"ory is etroleum and etroleum roducts/
Other imorts include= industrial machinery* construction machinery* trucks*
automo%iles* comuters* comuter arts* medicines* harmaceutical roducts* food
items* civilian aircraft* defense e4uiment* iron* steel* toys* electronics* and other
consumer items/
Sales ta! is levied at 1: ercent %oth on imorts and domestically roduced
roducts/ The income 0ithholdin" ta! is levied at G ercent on imorts and at Q/:
ercent on the sales of domestic ta!ayers/
DEFICIT
Pakistan suffered a merchandise trade deficit of 51Q/:26 %illion for the financial year
233GA8/ The "a has considera%ly 0idened since 2332AQ 0hen the deficit 0as only
51/3G %illion/ Services sector deficit for 233GA2338 stood at 5E/12: %illion 0hich
e4uals the services e!ort of 5E/12: %illion for the same year/
The com%ined deficit in services and "oods stand at 518/G:Q %illion 0hich is aro!
6Q/: ercent of countryRs total e!ort of 521/1QG <Uoods and services?/ The rise in the
trade "a has %een attri%uted to hi"h oil imort %ill* and rise in the rices of food
items* machinery and automo%iles/
C1rrent .cco1nt 8e9icit A Current account deficit for 233GA8 reached 58/31G %illion
u %y E1 ercent over revious yearRs 5E/E73 %illion/
SUMMARY
/!!0

Devaluation decreases the rices of our e!orta%le "oods and simultaneously
increases rices of "oods 0e are imortin" from a%road as 0ell as increases domestic
rice level of "oods and commodities* thus reducin" the urchasin" o0er of the
eole of the country/ It may create inflation in the country/ Our lon" e!erience has
sho0n us that devaluation is not the roer remedy for economic "ro0th of the
country/ It has resulted in increasin" our de%t %urden to the e!tent that no0adays it is
not ossi%le to o%tain easily any aid from 0orld lendin" a"encies/ It may %e reali-ed
that for 0hatever reason 0e devalue our currency it results in manifestation of
0eakness of our economy to the other countries/ &urther* e!cessive devaluation of the
ast has adversely affected our credit ratin"/ Moreover forei"n investors are no0
more conscious or reluctant for makin" any investment in the country/ Only lo"ical
ath availa%le to us is to try to reduce the cost of roduction of our e!orta%le "oods
and increase the roductivity of the "oods* 0hich 0ill ena%le us to comete in the
0orld market/ Particiation of everyone concerned to0ards the a%ove "oal 0ill make
a difference* %ut 0e should do it no0 not later/
DELETING FOREIGN RESERVES
$s of Octo%er 11* PakistanRs forei"n currency reserves totaled 58/8: %illion <Dh26/EE
%illion?* havin" fallen 5:83 million in a 0eek/
Critically* the central %ankRs share of this has fallen to 5E/QE %illion* 0hile
commercial %anks held 5Q/E1 %illion/
$s a result of deterioratin" e!ternal %alances and d0indlin" reserves the ruee fell
almost 2/6 er cent in a day to a record lo0 of 6E/E3* havin" lost 28 er cent since the
start of 2336/
OUESTIOND 'oE c.n .3ist.n =e:p itse:9 stop t=e s:i8e into econo;ic c=.osC
ANSWERD Raise interest rates* 0hile easin" %anksR li4uidity* imose caital controls*
%an imorts of nonAessentials* and limit ho0 much forei"n currency forei"ners can
%uy usin" ruees/
DECREASED CREDIT RATING
/+0

Standard 9 PoorRs said it has lo0ered its lon"Aterm forei"n currency soverei"n
credit ratin" for Pakistan to CCC] from B and its lon"Aterm local currency
ratin" to BA from BBA/ $t the same time* S9P lo0ered its shortAterm ratin" on
the soverei"n to C from B/ The outlook on the lon"Aterm ratin" is ne"ative/
The ratin" on PakistanRs senior unsecured local currency de%t has also %een
lo0ered to BA from BBA* 0hile the forei"n currency de%t ratin" has %een
lo0ered to CCC] from B/
The do0n"rade comes in the 0ake of continued stee erosion of PakistanRs
e!ternal li4uidity osition* the e!tent and ace of 0hich casts risin" dou%ts
a%out the soverei"nRs a%ility to meet aro!imately 5Q %illion of e!ternal de%t
servicin" commitments in the comin" year/
@PakistanRs %alance of ayments is under si"nificant and risin" ressure*
0here%y e!istin" structural trade im%alances are ma"nified %y e!o"enous
rice shocks*@ said Standard 9 PoorRs credit analyst $"ost Benard/ @$t the
same time* caital inflo0s* 0hich had in the ast covered much of the current
account "a* are increasin"ly deterred %y the rolon"ed olitical uncertainty
and adverse security climate/@
'et forei"n reserves of the central %ank have fallen G8 er cent to Fust 5E/8
%illion since Octo%er 2338* as the country recorded an overall %alance of
ayments deficit of 5:/8 %illion for fiscal year 2336 ended Tune/ &or the first
t0o months of fiscal 2337* the overall %alance of ayment deficit e!anded
more than si! fold year on year to nearly 52/: %illion* 0ith the current account
shortfall reachin" 1/G er cent of UDP a"ainst a fullAyear tar"et of G er cent/
Standard 9 PoorRs %elieves that sta%ili-in" PakistanRs e!ternal osition* and
thus avoidin" nearAterm de%t service stresses* 0ill re4uire su%stantial and
timely multilateral and %ilateral assistance* concurrent 0ith fiscal and
monetary olicy measures aimed at arin" a""re"ate demand to cut imort
"ro0th/
The ne"ative outlook reflects S9P#s e!ectation that multilateral and %ilateral
aid* includin" deferred oil ayment schemes* may not %e timely enou"h* or
sufficient in ma"nitude to stem the loss of e!ternal li4uidity/ It also
incororates the vie0 that the necessary olicy measures* some of 0hich are
likely to %e rere4uisites for multilateral assistance* 0ill face o%stacles and
delays in imlementation* "iven the fractious and unsta%le domestic olitical
scene* and risin" social tension/
The ratin" on Pakistan could %e lo0ered further if the forei"n e!chan"e reserve
cushion continues to shrink and meanin"ful economic sta%ili-ation measures remain
0antin"/ Conversely* the ratin" could sta%ili-e and eventually %e raised if e!ternal
assistance and domestic olicy ro"rams successfully sta%ili-e PakistanRs %alance of
ayments osition and forei"n reserves/
Me.s1res 9or correctin< t=e A8?erse B.:.nce o9 .2;entsD
/!,0
Pakistan cannot afford to run a ersistent deficit in the %alance of ayments on current
account as it does not have unlimited reserves of "old and forei"n currencies/ It can
neither ersistently %orro0 from the rest of the 0orld/ There is* after all* a limit of
accumulation of de%t 0hich may %e for the develoment urose/
The adverse %alance of ayments can %e decreased in three 0ays=
$i%The forei"n earnin"s should %e increased %y e!ort led
"ro0th/
$ii% The imorts should %e curtailed to essential items only/
$iii% The e!enditure on invisi%le imorts should %e minimi-ed/

EAport Le8 GroEt=D
E!ort lays an imortant role in the "ro0th of the economy/ It is re"arded a key
factor in the economic develoment/ $s re"ards Pakistan* it has rich mano0er and
real resources/ If they are roerly e!loited and utili-ed* there can %e si"nificant
imrovement in e!orts and forei"n e!chan"e earnin"s/ The follo0in" measures need
to %e adoted for increasin" e!orts and alleviatin" the %alance of ayments
ro%lems=
/!0 ro;otion o9 :.-or>intensi?e in81stries. Pakistan has to "ive riority to the
develoment of those industries 0hich are la%or intensive/ The chea la%or
comared to many other develoin" and develoed countries of the 0orld can "ive
a comarative advanta"e in the roduction and e!ort of commodities/ The e!ort
earnin"s* therefore* can increase and hel in restorin" e4uili%rium in the ersistent
adverse %alance of ayments of the country/
/"0 Di?ersi9ic.tion o9 eAports. PakistanRs e!orts since Indeendence have %een
sho0in" heavy concentration on a fe0 rimary commodities/ If there is a recession
in the internationalR market for cotton and rice or 'ature is not kind* the roduction
declines and e!orts are "reatly reduced and have a dama"in" effect on the %alance
of ayments/ We shall* therefore* have to diversify our e!orts and produce value
added goods for gaining competitive strengt" in t"e international mar&et'
/#0 De?e:op;ent o9 in81stries =.?in< :oE c.pit.: o1tp1t r.tio. Pakistan 0ith lo0
forei"n e!chan"e earnin"s cannot afford to imort heavy machinery/ If Pakistan
like China* .orea* Tai0an> ,on" .on"* Sin"aore* takes u lines of roduction
havin" a lo0 caital outut ratio* it can lead to fast "ro0in" e!ort/ The e!orts of
caret and ru" industry* ci"arettes industry* sorts industry* leather industry* etc/*
have considera%ly increased the e!ort earnin"s of Pakistan in the ast fe0 years
and have decreased strain on the %alance of ayments/
/$0 Decre.se in cons1;ption. In site of raid rise in rices* there is a "reater
increase in national consumtion Gf various commodities roduct at home and
imorted from a%road/ The hi"her consumtion of locally manufactured "oods is
reducin" the e!orta%le surlus and conse4uently the forei"n earnin"s to the
country/ Peole shall have to %e motivated to adot simle livin" and austerity for
%rid"in" the resource "a/
/%0 Restor.tion o9 sic3 in81stries. The sick industries in the nationali-ed u%lic
sector should %e transferred to their o0ners/ The rivate sector has the caacity to
reactivate the dyin" industrial units and increase roduction for use at home/ It
can thus increase e!orts to earn the much needed forei"n e!chan"e/
/(0 Re81ction in eAport 81ties. Reduction in e!ort duties* u%licity of locally
manufactured "oods in the forei"n markets and ade4uate rovision of credit to the
rivate sector for develoment of industries can "reatly hel in increasin" e!ort
earnin"s and relievin" the ressure on %alance of ayments/
/)0 'i<= L1.:it2 <oo8s. In order to cature forei"n markets* it is necessary that hi"h
4uality "oods at minimum cost should %e roduced in the country/
/*0 ricin< o9 <oo8s. &or increasin" e!orts* it is necessary that "oods should %e
roduced under otimal conditions and offered at cometitive rices in the
international market/
/+0 .c3in<. &or romotin" e!orts* hi"h 4uality ackin" is essential/ If ackin" is
not attractive and dura%le* it 0ill not cature forei"n markets/
/!,0 Cre.tion o9 eAport .<encies. &or %reak throu"h in e!orts> e!ort a"encies
should also %e created in the rivate sector* follo0in" suit of China and other recently
industriali-ed countries/
/!!0 Noint ?ent1res. The e!orts can also %e ushed u %y esta%lishin" industries
0ith Foint ventures of forei"n investors/ The roducts of these industries can %e
sold in the forei"n markets and the country can earn si-ea%le forei"n e!chan"e/
Current Account Balance
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
1974-75 1979-80 1984-85 1989-90 1994-95 1999-2000 2004-05
Y ears
The only reason the current account %alance has come into the ositive is %ecause of
the role of remittances after 7;11/ The level of remittances rose sharly due to the
insecurity of nonAresident Pakistanis in keein" their hardAearned money a%road/ So*
this increased the amount of remittances enterin" into the country/ This is 0hy there
is a stee curve in the years after 2331/ ,o0ever* the increase in the level of imorts
and the hu"e rise in the trade deficit offset this increase in remittances in the recent
years/ The increase in imorts has lar"ely %een due to the imorts of machinery and
oil for the country/
Trade Balance
-4000
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
1974-75 1979-80 1984-85 1989-90 1994-95 1999-2000 2004-05
Years
T
r
a
d
e

B
a
l
a
n
c
e
(
U
S

$

M
i
l
l
i
o
n
)
The trade %alance has remained ne"ative in the ast Q2 years/ ByAandAlar"e* it is due
the factors already hi"hli"hted a%ove such as the narro0 e!ort %ase* e!ort in
rimary roducts* concentration in e!orts* and reliance on forei"n roducts in the
technolo"yAoriented roducts/
S1<<estions to i;pro?e t=e BO ositionD
Reaffirmin" the efficient e!ortAled "ro0th can make a si"nificant contri%ution to
reducin" Pakistan#s trade deficit and e!ternal financin" needs* the measures 0hich
"overnment should adot are=
(' ,i"hest riority to imrovements in e!ort unit values and e!ort 4uality throu"h
enhanced fiscal concessions* the develoment of technolo"y institutions* and
trade houses>
)' a more effective and comrehensive system of e!ort comensation>
*' a fundamental chan"e in e!ort 4uota olicy for te!tiles so as to ma!imi-e value
addition>
+' a si"nificant casin" of access to imorted ra0 materials and modern machinery to
facilitate 4uick moderni-ation and technical u"radin" of e!ort industry* as 0ell
as imrovin" 4uality standards>
,' imrove access to credit for e!orters throu"h the esta%lishment of an E!ort
Credit Win" in the State Bank of Pakistan* "reater emhasis of roduct desi"n
and marketin" strate"ies %y enhancin" financial resources of the E!ort Market
Develoment &und>
-' Secial stes to accelerate the develoment and moderni-ation of o0erAloom
sector> simulatin" e!ort cometition throu"h the induction of the rivate sector
in the e!ort of rice and cotton>
.' Removal of all restrictions on the te!tile sector includin" ermission for the free
imort of hi"h 4uality yarn>
/' &or"in" a closer link %et0een e!ort and imort flo0s throu"h trade dilomacy
and secial incentives for the e!ort of en"ineerin" "oods>
0' Esta%lishment of efficient mechanisms for imlementin" and monitorin" e!ortA
secific measures/
LAW I ORDER SITUATION
/!#0

(arious unto0ard incidents of %om% e!losions at the u%lic laces*
eretration of suicide %om%in"s %y e!tremist elements %athed in reli"ion and
do"matism and firin" of %ullets on the innocent civilians %y the miscreants %ear out
that (olatile la0 and order situation is "ravely affectin" social* olitical* economic
and reli"ious fa%ric of Pakistan/ This un0anted state of affairs has "iven %irth to
uncertainty and frustration 0hich are actin" as %li"ht in our society/ 'o u%lic lace
is secure* no reli"ious institution is sacrosanct and no siritual or olitical
con"re"ation is safe/ Talented eole are leavin" the +and of the Pure for "ood
%ecause their fate is in the doldrums due to uncertainty of Fo%s and insecurity to their
life and roerty/ Thus menace of ^Brain Drain_ is continuously derivin" the
country of the intellectuals that are the true assets of the country to resolve its
intricate ro%lems/
Our tourism industry is in the doldrums due to security concerns/ Desite
scenic %eauty of hilly areas* "listenin" eaks* to0erin" mountains* "ushin" rivers*
archeolo"ical sites* and historical monuments *the PTDC and the Tourism Ministry
have %adly failed to catch the attention of the forei"n tourists %ecause no one 0ill take
risk to visit a country 0here indi"enous oulation is not secure and its rulers address
u%lic "atherin"s %ehind %ullet roof screens/ Pakistan has a lot of investment
otential 0hich could not %e fully taed %ecause of violent incidents/ Therefore* the
economy of Pakistan is in the sham%les/
In Tanuary and &e%ruary* a lar"e num%er of eole livin" a%road* includin"
forei"ners and Pakistanis* visited Pakistan> ho0ever* the num%er has decreased in
March/ $ lar"e num%er of eole from Pakistan 0ent a%road durin" March/
This ever deterioratin" la0 and order situation is not only knockin" do0n the
num%er of eole tourin" Pakistan* %ut is also affectin" other areas like
+ocal %usiness
&orei"n investments
Sorts
Entrereneurshi oortunities
Develoment roFects
Civil life
The investors fear of sinkin" their investment due to unendin" terrorist
incidents/
SITUATION IN NORT' AKISTAN
/!#@ !$0

&allin" la0 and order situation has drastically hit an influ! of forei"n tourists into the
&rontier rovince in the eak season causin" colossal financial losses not only to the
rovincial "overnment %ut also to all those associated 0ith tourism industry/

Only a handful of forei"n tourists visited the ancient city in May and Tune/ Pesha0ar*
once %ein" the hu% of forei"ners tourin" various summer resorts located in 'orthern
$reas* is yearnin" for old "ood days 0hich may not return due to the e!istin" la0 and
order situation in the re"ion/

City hotels and centuries old %a-aars 0ith a history includin" Sissa .h0ani* Cho0k
\ad"aar* .hy%er Ba-aar* Ba-aarAeAMis"aran* Shah Wali Satal* Tehsil Uor"hathri*
Da%"ri and various others in the 0alled city#s old areas* flocked %y forei"n visitors in
the ast* are today derived of their resence/

,andicraft* caret* coer and %rass0are shos have no forei"n customers and tour
oerators have no %usiness for a"es/

^On:2 !$ 9orei<n to1rists ?isite8 t=e ;1se1; in M.2 .n8 N1ne@ tEo -1siest
to1rist ;ont=s*_ Directorate of $rcheolo"y and Museums Deuty Director Sa-i IFa-
$hmed told Daily Times/

Out of 1E tourists* ei"ht 0ere $mericans* t0o Bel"ians* t0o Chinese* one Taanese
and one 0as Ureek/
To1ris; =.s 8roppe8 +%J. There are over Q33 hotels in only .alam area of S0at
and there is no %usiness causin" hu"e financial losses to them/
T=e Frontier pro?ince =.s :ost F$, ;i::ion in t=e p.st 9i?e 2e.rs@ .:;ost
F*;i::ion . 2e.r.
Prolon"ed olitical uncertainty and fra"ile economic situation couled 0ith
deterioratin" la0 and order in the northern art of the country and the )S threats of
direct attacks in tri%al areas have not only shattered the confidence of forei"n
investors %ut also forced domestic investors to ull out of the e4uity markets/ Loc.:
In?estors =.?e :ost -i::ions o9 r1pees Eit= . sin<:e in?estor =.?in< reporte8 !#
;i::ion .:one.
ROOSED REMEDY
&ollo0in" remedial measures are called for to check this eril of mayhem/
It is %itter oen secret that in recruitment of the olice <esecially in the lo0er
ranks?* there are several incidents of usin" under the ta%le means for "ettin" a
contractual Fo%/ Institutions 0hich are erected %y %ricks of corrution and insecurity
of Fo% cannot rovide any "uarantee to disense Fustice and security to life and
roerty to the citi-ens/ Therefore* meritocracy and Fo% security is essential/
Most of the olicemen carry o%solete "uns and only five %ullets er erson
0hile ro%%ers and terrorists carry latest 0eaons and surlus ammunition/ Therefore*
the olice avoid chasin" such dan"erous criminals %y riskin" their o0n life/ Thus
miscreants can easily take to their heels/ Therefore* olice should %e e4uied 0ith
latest 0eaons and scores of %ullets/
There must %e coordination and sharin" of information amon" intelli"ence
a"encies* +E$s and the Interior Ministry/
Pakistan is har%orin" $f"han refu"ees and other forei"ners on the %asis of
reli"ious fraternity/ But* no country can afford to rovide sanctuary to forei"n
elements 0hich are kno0n to involve in ille"al and mutineer activities and oisonin"
the country 0ith heroin culture/ The "overnment should take %old stes to send these
refu"ees to their native countries/ It should rovide nationality to eace lovin" eole
accordin" to the la0 of the land/
The olice 0ith the hel of media should launch a ,erculean camai"n for
de0eaoni-ation of ille"al armaments indiscriminately/
There is cryin" need of reformation of social* olitical and reli"ious
institutions for roer sociali-ation of the nation 0ith the hel of media %y
indoctrinatin" altruism* fraternity* humanity* reli"ious tolerance and atriotism/
Massive overty stricken and illiterate oulation derived of %asic amenities of life
are frustrated due to ramant corrution* social inFustice* economic disarity* and
olitical e!loitation that force them to snatch their food 0hich create la0 and order
situation/
The "overnment should take a firm stand a"ainst the uncalledAfor attacks %y
the )S army in Pakistani territory/
Without resolvin" these knotty ro%lems the esta%lishment of eace and
harmony 0ill remain distant dreams/
DOMESTIC ISSUES
The World Economic &orum <WE&? recently came out 0ith a reort titled Ulo%al
Cometitiveness 233GA38/ It ut Pakistan at num%er 71 out of 12: countries in the
"lo%al race for cometitiveness* 0hich is an eyeAoener for the "overnment and its
team/
Thou"h the national economy#s cometitiveness has increased %y three oints over
the revious year* it 0as still E6 ranks %ehind India <at no EQ?* 12 laces %ehind Sri
+anka <at no 87?* %ut ahead of Ban"ladesh <at 77? and 'eal <at 113? in the re"ion/
'ine factors that are critical to drivin" roductivity and cometitiveness 0ere used as
the yardstick/ These are as follo0s=
W Institutional infrastructure= The life cycle of institutions is lo0 in Pakistan as
comared to other countries and a lot of effort is needed to overhaul the e!istin" outA
dated infrastructure in the country* esecially in the "overnment sector/ Corrution*
accounta%ility and "ood "overnance are still missin"/ Structural 0eaknesses need to
%e addressed/ India has %een ranked the most corrut country in the 0orld %ut it is
still far %etter than Pakistan in the develoment of infrastructure/
W MacroAeconomy <6Gth?= Due to the continued u0ard economic develoment*
macroAeconomic rankin" has enhanced u0ard/ But it is still far less comared to
India and even SriA+anka/ This sho0s that the country is still far a0ay from the "oal
of sustaina%le "ro0th and any set%ack at the domestic or international level can derail
the 0hole rocess of economic "ro0th in a short eriod of time <0ar a"ainst Iran* or
hi"h rices of oil can %e fatal to national economy/
Pakistan#s lo0 levels of er caita income and hi"h incidence of overty*
unemloyment* illiteracy* 0idenin" "a of trade and current account deficits*
decreasin" ratios of e!orts* unsuita%le de%ts retirement strate"y* re"ional and
sectoral arity are suosed to %e one of the main reasons for this lo0 rankin"/ It
should %e a lesson for all the economic mana"ers and advisors 0ho are al0ays
en"a"ed to "lorify the "olden achievements of the "overnment in the economic arena/
W ,ealth and rimary education <136th?= The resent "overnment had sanctioned
RsE:3 million for PSDP in the current %ud"et/ The "overnment of PunFa% is also
tryin" its %est to sread the net0ork of schools throu"hout the rovince and yet
erformance is less then desired/
W ,i"her education and trainin" <13Eth?= $lmost Q to E er cent of the federal %ud"et
is sent on the education sector* 0hich is very lo0 as comared to other countries in
the re"ion/ Recently* the federal "overnment has slashed the allocations of funds to
hi"her education develoment in the country* 0hich has %adly affected our soAcalled
hi"h am%itions to0ards 4ualitative and 4uantitative hi"h education tar"ets/
W Market efficiency <:Eth?= 'o dou%t the market efficiency has imroved %ut a lot of
thin"s need to %e imroved further/ &reeAmarket mechanism* ositive role of
re"ulatory %odies* conducive macroAeconomic olicies in the short eriod of time of
the "overnments* meanin"ful incentives* trade li%erali-ation* financial dere"ulation*
cororate "overnance* and a%ove all olitical commitment to make country a hu% of
all the industrial activities has su%stantially increased/ The %ulk inflo0s of &DI* &PI
and Foint ventures in the country verify it/
W Technolo"ical readiness <67th?= Most "overnment deartments and rivate sectors
are reluctant to adot most advanced technolo"ies in the country/ The WB* IM& and
$DB have dis%ursed many loans for raid technolo"ical adotion and automation/
Technolo"y makes thin"s easier and s0ift/ But the lack of rofessionalism alon" 0ith
the shorta"e of funds is suosed to %e the key elements for the denial of
technolo"ical readiness/
WPoor 0ork ethics* cultural and historical %ack"round also ne"atively affect factors
like innovation* technolo"ical readiness and %usiness sohistication/ The firm use of
technolo"y and rates of technolo"y transfer are lo0* althou"h enetration rates of
latest technolo"ies are still 4uite lo0 %y international standards/ Mo%ile telehones*
Internet* ersonal comuters are increasin" day %y day in the country/
W Business sohistication <G3th?= Doin" %usiness is easy in Pakistan as comared to
other countries of the re"ion/ Procedures are made simle and easy/ Official
interference is lo0/ The "overnment is tryin" its level %est to create %usinessAfriendly
and investmentA friendly environment in the country/ But deterioratin" la0 and order
situation throu"hout the country alon" 0ith the continued ersistence of o0er
shorta"e are suosed to %e the main concerns for the "overnment in the days to
come/
!0 T=e e:ectricit2 crisis
With constant o0er outa"es* a lot of local and forei"n initiated %usiness have
suffered humun"ous financial losses/ Their roduction hours have %een hit*
roduction oututs have decreased and a%ility to meet orders has 0eakened/ In
order to %e a%le to "ive the same level outut* more roduction hours 0ere
re4uired* 0hich in turn raised the cost of caital and made thin"s more
e!ensive/
This crisis is also a maFor red alert stoin" otential `0ell needed# 9orei<n
8irect in?est;ents.
"0 Deterior.tin< :.E .n8 or8er sit1.tion
Misery* overty and hellessness has %een on the rise in the Pakistani nation/
Cases of inFustice* corrution* neotism and constant e!loitation of the
citi-ens has raised the frustration of the "entry to a %oilin" oint 0hich comes
out in the form of fre4uent ro%%eries* an"ry mo%s* rotests and rallies/ This*
couled 0ith the fre4uent %om% e!losions has driven a0ay local and forei"n
investors* thus takin" out a share of Dollar 0hich Pakistan once held/
W Innovation <GGth?= Pakistan#s economy is assin" throu"h 2nd "eneration reforms/
The follo0in" factors are contri%utin" to0ards sustaina%ility of the national economy=
effective* innovative* financial* de%t mana"ement and alternative marketin"
techni4ues lus uroseful currency e!chan"e olicies/
To "et the accurate feed %ack and imartial results* over 11*333 %usiness leaders
across the 0orld 0ere olled in a record num%er of economies <12:?/ The survey
4uestionnaire 0as desi"ned to cature a %road ran"e of factors affectin" an
economy#s %usiness climate that are critical determinants of sustained economic
"ro0th/
The most cometitive economies in the 0orld are those 0here concerted efforts are
made to frame comrehensive olicies* 0hich reco"ni-e the imortance of a %road
array of factors* their interconnection* and the need to address the underlyin"
0eaknesses in a roactive 0ay//
SUMMARY
The lo0 rankin" in almost all the nine crucial areas sho0s 0hy the country continues
to %e uncometitive and unresonsive to the challen"es of a dynamic 0orld economy/
The declinin" trends in the te!tile e!orts sho0 increasin" uncometitive nature in
the international markets/ Basic diversification of e!orts and the fra"ility of the
economy are lar"ely missin"/
Our country does not have the tools to ac4uire comarative advanta"e in other
commodities in a cometitive 0orld environment %ecause of lack of innovation*
technolo"ical readiness or other factors identified %y the WE&/
,o0ever* the first ste to chan"e is reco"ni-in" "rey areas and no0 that this has %een
done* let us hoe that Pakistan shall %e cometitive in 0orld markets in the days to
come/
GLOBAL ISSUES
OVERVIEW
The ruee 0as 4uoted at a record lo0 in recent days %ecause of the "lo%al financial
crisis and concern a%out tension %et0een Pakistan and the )nited States over )S
attacks on militants in Pakistan/
One of the main reasons is the "lo%al financial crisis 0here some forei"n
%anks have %een asked to cut do0n their e!osure in Pakistan/
$merica sa0 t0o of its le"endary firms %ite the dust over the 0eekend>
+ehman Brothers ,oldin" Inc filed for %ankrutcy and Merrill +ynch 9 Co CEO
Tohn Thain struck a deal to sell out to Bank of $merica/
The )S "overnment then %ailed out insurer $IU for 56: %illion/
)S shares rices lummeted to threeAyear lo0s and forced increasin"ly
deserate maFor %anks to scram%le for mer"er artners/
Dealers said the market 0as nervous a%out the situation on the PakistanA
$f"hanistan %order after a )S missile strike killed five militants hours after the to
)S military officer said the )nited States 0as committed to resect Pakistan#s
soverei"nty/
The market 0as short of dollars also %ecause of the State Bank#s %uy;s0a
oerations/ The State Bank of Pakistan <SBP? has %een %uyin" dollars in the ready
market 0ith a simultaneous commitment to sell dollars %ack at future dates* they said/
SUBRIME
Memories are short in the a"e of financial "lo%ali-ation/ While a decade a"o
conta"ion effects from siralin" $sian markets imeriled "lo%al economies* today a
lot of the market volatility stems from the su%rime mort"a"e conta"ion from the )S/
This roleAreversal is illuminatin" a arado! lays a shre0d art in economics/
The su%rime virus has truly "one "lo%al/ What started as a locali-ed out%reak
in the already lethar"ic )S market has sread to suosedly safer markets and asset
tiers/
$ "ross misricin" of "lo%al risk* eretuated %y insatia%le sellin" of
collatateralised de%t o%li"ations <CDOs? and financin" levera"ed %uyouts* led to
underareciated risk ha-ards/ $ fli"ht from risk follo0ed* seein" "lo%al stocks
slum and Treasury yields comressin" %y :1 to G1%asis oints across the curve/
&inancial institutions from around the 0orld have reco"ni-ed su%rimeArelated
losses and 0riteAdo0ns e!ceedin" )/S/ 5:31 %illion as of $u"ust 2336/ Profits at the
6*:QQ )/S/ %anks insured %y the &DIC declined from 5Q:/2 %illion to 5GEG million
<67B? durin" the fourth 4uarter of 2338 versus the rior year* due to soarin" loan
defaults and rovisions for loan losses/ It 0as the 0orst %ank and thrift 4uarterly
erformance since 1773/ &or all of 2338* these %anks earned aro!imately 5133
%illion* do0n Q1B from a record rofit of 51E: %illion in 233G/ Profits declined from
5Q:/G %illion to 517/Q %illion durin" the first 4uarter of 2336 versus the rior year* a
decline of EGB/
The financial sector %e"an to feel the conse4uences of this crisis in &e%ruary
2338 0ith the 513/: %illion 0ritedo0n of ,SBC* 0hich 0as the first maFor CDO or
MBO related loss to %e reorted/ Durin" 2338* at least 133 mort"a"e comanies
either shut do0n* susended oerations or 0ere sold/ To mana"ement has not
escaed unscathed* as the CEOs of Merrill +ynch and Citi"rou 0ere forced to resi"n
0ithin a 0eek of each other/ (arious institutions follo0ed u 0ith mer"er deals/
M.Kor -.n3s .n8 ot=er 9in.nci.: instit1tions .ro1n8 t=e Eor:8 =.?e
reporte8 :osses o9 .pproAi;.te:2 USF$#% -i::ion .s o9 !) N1:2 ",,*/ The
henomenon of su%rime caused maFor financial "iants like +ehman Brothers to file
for %ankrutcy/ Since 1 Tanuary* 2336* o0ners of stocks in )/S/ cororations have
suffered a%out F* tri::ion in :osses* as their =o:8in<s 8ec:ine8 in ?.:1e 9ro; F",
tri::ion to F!" tri::ion/ +osses in other countries have avera"ed a%out E3B/ It shook
the stron"est of economies forcin" countries to intervene to save their economies/ The
)S came u umed 5 833 %illion in its market/
US@ WAR ON TERROR@ FOOD CRISIS AND MORE
We have seen that our economic crisis is driven rimarily %y the "lo%al
economic crisis that in turn is driven %y the u0ard siralin" rice of oil and the
do0n0ard siralin" value of the dollar/ The third crisis* 0hich for us is at least as
"reat* is the "lo%al food crisis/ This last should suit $merica %ecause it 0ill make
food deendent countries even more deendent 0hile it 0ill still retain enou"h
stren"th to feed the vast maFority of its o0n eole/ &or us the food crisis should %e
much less acute than the oil and dollar crises %ecause 0e are rincially a foodA
"ro0in" country 0ith the caacity to easily feed our o0n eole* 0hile the other t0o
crises are totally out of our control/ We are their helless hosta"es/ When the 0orld
recession of the 'ineties started* it used to %e said that* ^,e 0ho has cash is kin"/_
Today* %ecause cash is increasin"ly losin" value <urchasin" o0er? at an alarmin"
rate* the 0isdom is= ^,e 0ho has land is kin"/_ Or should %e if he has any sense/ This
is true %oth for individuals and states/ By that measure* 0e are a very lucky and
0ealthy country/
,o0 imortant the caacity to "ro0 one#s o0n food is 0as underlined %y
Bruno .riesky* the late "reat Chancellor of $ustria ^$ country that cannot even feed
its o0n eole has no ri"ht to call itself a suero0er*_ he said a%out the Soviet
)nion* no0 late* unlamented/ $ fe0 years later the old man 0as roved ri"ht 0hen
the )SSR 0ith the 0orld#s mi"htiest military machine laced 0ith Q2*333 nuclear
0arheads collased %ecause it couldn#t feed its o0n eole/ )nderstand the 0ord
^feed_ in the %roader sense and it 0as 0orse/ Modify Chancellor .riesky#s statement
today to* ^$ country that cannot even feed its o0n eole has no ri"ht to call itself
soverei"n or indeendent/_ We can/ Therein lies not only our %asic stren"th %ut the
0here0ithal of our survival* rovided[@ and it#s a very %i" rovided[@ 0e utili-e this
asset sensi%ly and in the national interest and distri%ute %oth its roduct and its "ains
e4uita%ly/ We are not/ It 0as said on a television talk sho0 that in the PunFa% alone
<for"et the rest of Pakistan? 8 million male calves and Q million older cattle die every
year due to ne"lect* 0hile the annual "lo%al trade in %eef is 563 %illion/ Our share in it
is -ilch/ 'either are 0e otimi-in" our cros yields 0ith ne0 kno0Aho0/ 'or*
aarently* are 0e doin" anythin" a%out the 0heat fun"us that has reached \emen
and could reduce our 0heat outut to -ero if it reaches Pakistan/
To simly accet the contention that the "lo%al food crisis is caused only %y
too much land %ein" allocated to roducin" cros that roduce the etroleum
su%stitute %iofuel ethanol is to %e simlistic in the e!treme/ ,i"h food rices are also
driven %y hi"h etroleum rices/ Where do you think the farmer "ets electricity from
that runs his um to 0ater his fields[ What do you think runs his tractors and
harvesters* the trucks on 0hich his roduce is transorted from farm to market[ ,i"h
oil rices mean hi"her electricity costs* or even inade4uate electricity as 0e no0
have/ What haens then[ We end u 0ith food too e!ensive to %uy or even scarce*
ro%a%ly %oth* as 0e also no0 have/ It all "oes %ack to oil and its rice* not to
mention distri%ution and "reedAdriven hoardin"/ We have to make a doa%le lan
immediately to use our ener"y resources in the most efficient and otimum manner to
overcome ener"y shortfalls %oth in terms of 4uantity and rice/
Euroe alone is sittin" on rover%ial ^lakes of 0ine and mountains of %utter/_
Why not ut all this food into the markets of the oor[ It all has to do 0ith Control
0ithout Resonsi%ility* $merica#s latest doctrine/ $merica kno0s 0hat it is doin"*
not Fust re"ardin" food %ut also oil/ They had the decline of the dollar under control
too* until China steed in/ The tra"edy is that 0e do not kno0 0hat they are doin"
and 0e do not kno0 0hat 0e are doin"/

DOLLAR AND C'INA
The initial fall of the dollar 0as deli%erately tar"eted to reduce the trade
im%alance %et0een $merica and China/ $merica had the internal stren"th to
0ithstand the fallout[@ or so it assumed* for"ettin" ho0 inde%ted it is and to 0hom
and that it has neither the outut levels nor the ricin" of oil totally under its control/
The )S had %een askin" China for years to revalue the \uan* 0hich it thinks is
artificially undervalued/ When China did not the )S decided to devalue the dollar
instead* %ut it 0as a mana"ed devaluation* nothin" to "o hysterical a%out/ Then t0o
thin"s haened to make the )S lose some control* enou"h to make a difference=
China decided to sell some of the )S de%t that it holds and Iran setAu its EuroA
denominated Iranian Oil Bourse <IOB? on May :/ This knocked the 0ind out of the
dollar/
$merica is the most inde%ted country in the 0orld/ On Tune Q* 2336 at 7=3E=38
UMT its national de%t stood at 57*E88*181*GQG*GQ2/6:/ That is Fust under 57/:
trillionb Which means that at the same time and date each )S citi-en 0as inde%ted to
the tune of 5Q3*673/G7/ Considerin" that the overty line in $merica is 516*:33 er
annum* an $merican o0es nearly t0ice as much as the income of the 13 ercent
$mericans or over Q3 million human %ein"s that live in a%Fect overty in the richest
country in history/ These are the Foys of market forces caitalism for you/ The )S
national de%t has %een "ro0in" at the rate of 51/:: %illion er day since Setem%er
26* 2338/ That could ay off our entire forei"n de%t in a%out 2: daysb Their annual
military assistance to us is e4ual to one day of its "ro0in" inde%tedness/ Uandhi 0as
ri"ht= ^There#s enou"h for everyone#s need %ut not enou"h for everyone#s "reed/_
The )S de%t 0ould still have %een mana"ea%le if it had %een inde%ted to
itself/ $merica for"ot ho0 inde%ted it is to China %efore needlin" it/ China is the
0orld#s lar"est investor in )S Treasury %ills* %onds and securities <5E33 %illion in )S
TABills alone? and holds more )S de%t than any other country <a sta""erin" E3
ercent? e!cet Taan/ In addition* it holds a hu"e reserve of )S dollars %ecause its
currency* like ours* is tied to the dollar/ When a country has you %y 0here it hurts
most* you do not needle it li"htly/ $round midA$ril China fired a shot across
$merica#s %o0 0hen Ziu Tian* (ice Director of the Bank of China* the country#s
central %ank* said that it is considerin" shiftin" a maFor ortion of its national
currency reserve of 51/E trillion into ^more sta%le_ currencies/ The dollar took a
nosedive and fell to record lo0s @ the lo0est ever a"ainst the Euro* the lo0est in a
"eneration a"ainst the Sterlin" and the lo0est in :8 years a"ainst the Canadian dollar/
China fired another shot across $merica#s %o0 %y divestin" :3 ercent of its 5E33
%illion )S TABills to esta%lish a 5233 %illion fund to hel diversify its holdin"s in
e4uities and stocks around the 0orld/ &rench President Sarko-y said that* ^The dollar
cannot remain `someone else#s ro%lem#/ If 0e are not careful* monetary disarray
could morh into economic 0ar/ We 0ould all %e its victims/_ <David Uutierre- in
Ulo%al Research* $ril 18* 2336?/ China 0isely stoed %ecause the )S$ is also its
lar"est tradin" artner <that is 0here $merica has clout over it and most other
countries? and killin" the "oose that lays "olden e""s 0ould have meant China killin"
itself/ Euroe* ho0ever* couldn#t avoid the fallout as hi"h Euro and Sterlin" values
started erodin" its e!orts alarmin"ly 0hile it %ecomes too e!ensive to %reathe in/ $
lot of E) e!orts are shiftin" from Euroe to China/
,o0ever* don#t for"et that if $merica 0as not the cleverest country in the
0orld %ecause of its kno0led"e %ank* the lar"est there is* it 0ould not %e in the
osition of rimacy that it is in/ To ima"ine that China can destroy the dollar simly
%y sellin" its de%t and holdin"s is to %e naive/ $merica is not "oin" to take this lyin"
do0n/ It could demoneti-e/ It could force the rice of oil so hi"h that China#s
economy "oes into reverse "ear/ Or it could simly revert to the "old standard that it
left in 1781 and 0hich is the source of much of the 0orld currency crisis %ecause it
e!osed the illusion of aer money %acked %y itself as the mira"e that it really is
@not 0orth the aer it is rinted on/ If all currencies are 0orth so many dollars* 0hat
is the dollar 0orth[ ,ot air[ It %ecame oil* %ut that is de facto* therefore no total
control/ I 0onder 0hether the rice of "old has shot u only %ecause eole find it a
safer investment %et in today#s uncertainty or %ecause the )S is also 4uietly %usy
%uyin" u "old Fust in case it has to "o %ack to the "old standard and leave the rest of
the 0orld in the lurch/
Conclusion
$ si"nificant dan"er is that %y increasin" the rice of imorts and stimulatin" "reater
demand for domestic roducts* devaluation can a""ravate inflation/ If this haens*
the "overnment may have to raise interest rates to control inflation* %ut at the cost of
slo0er economic "ro0th/
$nother risk of devaluation is sycholo"ical/ To the e!tent that devaluation is vie0ed
as a si"n of economic 0eakness* the credit0orthiness of the nation may %e
Feoardi-ed/ Thus* devaluation may damen investor confidence in the countryRs
economy and hurt the countryRs a%ility to secure forei"n investment/
$nother ossi%le conse4uence is a round of successive devaluations/ &or instance*
tradin" artners may %ecome concerned that devaluation mi"ht ne"atively affect their
o0n e!ort industries/ 'ei"h%orin" countries mi"ht devalue their o0n currencies to
offset the effects of their tradin" artnerRs devaluation/ Such @%e""ar thy nei"h%or@
olicies tend to e!acer%ate economic difficulties %y creatin" insta%ility in %roader
financial markets/
Since the 17Q3s* various international or"ani-ations such as the International
Monetary &und <IM&? have %een esta%lished to hel nations coordinate their trade and
forei"n e!chan"e olicies and there%y avoid successive rounds of devaluation and
retaliation/ The 178G revision of $rticle I( of the IM& charter encoura"es
olicymakers to avoid @maniulatin" e!chan"e rates///to "ain an unfair cometitive
advanta"e over other mem%ers/@ With this revision* the IM& also set forth each
mem%er nationRs ri"ht to freely choose an e!chan"e rate system
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