Governments across the globe struggle to stabilise their currencies against the Federal Reserve’s rapid interest rate increases, tilting the field in favour of investors buying US assets, drawing more money into America and leaving the rest of the world desperate and confused as it scrambles to catch up. The Fed has raised rates five times this year and is expected to make further moves in an attempt to rein inflationary pressures in the United States, weakening currencies in some of the largest economies in the world, from Japan to China to Britain. Investors continue to funnel cash away from their own countries and into the United States in the hopes of better profits, exponentially increasing the cost of foreign borrowing for everyone else.
For a cash-strapped country like Pakistan, a weaker currency means that it costs more to import food, energy and other essential goods. With no currency-swap arrangements in place to import goods from other major economic powerhouses like Russia, Pakistan’s fate and survival are tied intimately to its relationship with the dollar. The rupee sank another Rs18.98 by the dollar earlier today, breaking all earlier records at Rs285.09.
Rich countries aren’t immune either. In Europe, which is already teetering towards a recession amid rising energy prices in the wake of Russia’s invasion of Ukraine, one euro is worth less than a dollar for the first time in 20 years. Ordinarily, countries are able to benefit from falling currencies because it makes products cheaper and more competitive overseas.
But at the moment, this seems highly implausible. Economic growth is stumbling everywhere, making imports more expensive and squeezing companies, consumers and governments that borrow in dollars. In response, central banks across the globe have raised interest rates to try and prop up their currencies which have slowed down economic growth and driven up unemployment considerably. However, for a country like Pakistan, foreign exchange intervention doesn’t quite cut it without major adjustments to macroeconomic policy, an issue that has kept the IMF from okaying its $7 billion deal with the country. In an environment like this, it is essential to enhance resilience. Reducing foreign-exchange mismatches by using capital flow management should be the priority right now.
