HomeBusinessHow a Strong Dollar Affects the Economy and Your Wallet

How a Strong Dollar Affects the Economy and Your Wallet

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How a Strong Dollar Affects the Economy and Your Wallet
How a Strong Dollar Affects the Economy and Your Wallet

“My first salary was Rs12,000 in 1996 when a dollar was equal to Rs34. The first salary in the same brokerage industry today is about Rs50,000, even though the dollar rate is higher than Rs228,” said Asif Qureshi. Asif Qureshi is the chief executive of the brokerage Optimus Capital Management.

It means that the first salary of a recent finance graduate in the brokerage industry has dropped from more than $350 a month. The drop is less than $220 in the interim period.

The bottom line is that dollar wages in Pakistan have declined. The decline is due to the steady devaluation of the rupee against the dollar over the years. People employed in the service sector are more exposed to the fluctuation of the dollar rate. It is less than their counterparts in the manufacturing sector, Qureshi says.

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“I can’t charge a higher brokerage commission in the name of depreciation. But a large chemical manufacturer will convey the impact of depreciation. They will keep its dollar-based profit margin intact,” he says.

“Experts say the industry can pass on rising costs to consumers. It is more insulated against exchange rate fluctuations than the service sector.”

An increase in the dollar rate is a key contributor to inflation. The economy relies on inevitable imports. The relief is from gasoline and medicines to legumes and books. The import bill exceeds export earnings by a wide margin each year. The excess results in a shortage of dollars in the local market. The exchange rate goes further north, fueling import-driven inflation.

Prices of consumer goods in common use rose 21.3 percent in June from a year earlier, due to expensive fuels and food.

So, is there any homemade trick that ordinary people can use to cut the impact of the strong exchange rate movement?

He advised people not to keep their savings in dollars or even gold as a hedge against inflation. There have been many years in which inflation outpaced rising dollar and gold rates. For example, the dollar rate budged during General Musharraf’s years in the 2000s for a variety of reasons. In the same vein, stock investors have not made a profit in the last six years or so.

Speaking to Dawn, former Federal Revenue Board Chairman Syed Shabbar Zaidi said there aren’t many people can do to escape the consequences of a dollar rate hike, other than reducing their gasoline and electricity consumption.

But what is the long-term way out?

Putting on his advisory hat, Zaidi said the economy will be better off if large conglomerates focus on generating an exportable surplus while expanding into segments that don’t rely on imported raw materials. That will slow the pace of dollar outflows and stop the uncontrolled depreciation that is wreaking havoc on the lives of ordinary people.

“We should also discourage foreign investment in banking and water sales businesses”. He said that referring foreign direct investment (FDI) leads to the repatriation of dollar-based profits and dividends each year.

Many economists believe that FDI, even though it does not create any debt obligations, has mostly been detrimental to Pakistan. FDI flows have been concentrated in consumption-based sectors such as telecommunications, banking, packaged foods and milk, soft drinks, and toiletries.

In other words, one-time dollar inflows generate zero foreign exchange for the country. Multinational companies convert their income in rupees into dollars in the local market and send the precious foreign currency to their foreign backers in the form of dividends every year.

“Why do we need a multinational to sell us water? Why do we need foreigners to invest in our banks? Don’t we already know the bank?” said Zaidi.


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