Money only holds value because there are goods and services available to buy with that money. Coconut water would be more valuable than a kilo of gold on an island. It is therefore, not the value of coconut water that has increased, but the diminished value of gold that is reflected.
Pakistan currently produces cotton, rice, fish, fruits, vegetables, pulses and many other goods. These goods in turn, add value to the Pak rupee. The worth of the rupee increases as the amount of goods produced in Pakistan increases. Instead of selling these goods in Pak rupees – which would create a ‘demand’ for the Pak rupee in the International Exchange Market - the State Bank of Pakistan settles it’s export payments in US dollars, known as Balance of Payment (BoP). Thus, any country that imports from Pakistan does not need to purchase the Pak rupee from the International Forex Market to pay for Pakistani products. This may sound trivial, but such a practice takes away from the value of the Pak rupee and transfers it to the US dollar (think Petro-Dollar). The Pak rupee then becomes like gold on an island as not much is left to be bought with.
Currently the State Bank of Pakistan uses the dollar and euro to settle its BoP account. One should realize that the value of the dollar and euro is not static. Due to the financial crises and socialization of the financial losses in the banking sector, American and European Central Banks have been running their printing press on turbo mode. The more the Central Bank prints or issues electronic credit to the markets, the more these currencies lose their value. By using a foreign currency, not only does Pakistan’s economy import American inflation but it also leads to the devaluation of the Pak rupee.
So why use the dollar? This goes back to the Bretton Woods Agreement of 1944 when the dollar was redeemable by gold. The American central bank, called The Federal Reserve, could not print dollar bills if it didn’t have the gold to back up the bills with. Eventually the gold window was closed in 1971 which should have marked the end of the Bretton Woods Agreement, but it didn’t. After all, why should a sovereign country use the currency of a foreign country when that currency can be devalued at the will of a foreign central bank? The whole idea goes against the concept of sovereignty. To add insult over injury, IMF lends loans in dollars to fill the BoP gap – loans that have to be paid back with interest. The interest has to be earned by Pakistan by exporting more of its goods. This is a double-edged sword as interest sucks the value out of imports and dollar inflation dilutes the value of exports.
The State Bank of Pakistan should demand payments for its exports to be settled in Pak rupees. But for the general public to see the fruits of its labour, the federal government needs to stop printing rupees and balance its budget. Otherwise, the fruits of labour that were saved from international bankers would be stolen by the Federal Government of Pakistan via inflation. It is high-time the Ministry of Finance takes notice of these issues as Pakistan has already passed its point of no return towards bankruptcy. Let’s save whatever there is left to be saved for future generations to come.