Originally published on July 24, 2022
KARACHI: “My first salary was Rs12,000 in 1996 when one dollar was equal to Rs34. The first salary in the same brokerage industry today is about Rs50,000, even though the dollar rate is over Rs228,” said Asif Qureshi, executive chairman of stock brokerage Optimus Capital Management.
It means the first salary of a fresh finance graduate in the brokerage industry has gone down from over $350 a month to less than $220 in the intervening period.
The takeaway is that the dollar wages in Pakistan have gone down significantly, thanks to the consistent devaluation of the rupee against the dollar over the years. People employed in the services sector are more exposed to the fluctuation in the dollar rate than their counterparts in the manufacturing sector, says Mr Qureshi.
“I can’t charge a higher brokerage commission in the name of depreciation. But a large chemical maker will pass on the impact of the depreciation and keep his dollar-based profit margin intact,” he says.
Experts say industry, with its ability to pass on rising costs to consumers, is more insulated against exchange rate fluctuations than services sector
A rising dollar rate is a key contributor to inflation. From petrol and medicines to pulses and books, the economy depends heavily on unavoidable imports. The import bill outstrips export earnings by a wide margin every year and results in a shortage of dollars in the local market. The exchange rate goes further north, fuelling import-led inflation.
Prices of commonly used consumer items increased 21.3 per cent in June from a year ago mainly because of costly fuel and food items.
So are there any home-brew hacks that ordinary folk can use to minimise the impact of the sharp exchange rate movement?
The most obvious resort is work-from-home, car-pooling and the use of energy-efficient equipment at home to lessen the impact of exchange rate–induced inflation, says Mr Qureshi.
He advised people against keeping their savings in dollars or even gold as a hedge against inflation. There’ve been many years in which inflation outpaced the increase in dollar and gold rates. For example, the dollar rate barely moved during Gen Musharraf’s years in the 2000s for a variety of reasons. In the same vein, stock investors have made no gains in the last six years or so.
The stock market needs a major influx of liquidity as shares are undervalued, he said. Fixed income funds are offering about 15pc returns, which can be a good hedge against inflation, he added.
Speaking to Dawn, Federal Board of Revenue’s former chairman Syed Shabbar Zaidi said there’s not much that people can do to escape the fallout of a dollar rate increase other than slashing their petrol and electricity consumption.
“But I must say our overall approach is flawed. We’re too focused on getting consumption reduced at the individual’s level. There should be a single-minded focus on reducing fuel and electricity consumption at the national level instead. Early closure of commercial centres is a must,” he said.
But what’s the way out in the long run?
Putting on his advisory hat, Mr Zaidi said the overall economy will be better off if big conglomerates focus on generating an exportable surplus while expanding into segments that don’t depend on imported raw material. That’ll slow down the pace of dollar outflows and arrest the runaway depreciation that’s wreaking havoc on the lives of ordinary people.
“We should also discourage foreign investment in banking and water-selling businesses,” he said while referring to foreign direct investment (FDI), which leads to dollar-based repatriation of profits and dividends every year.
Many economists believe that FDI — even though it creates no debt obligation — has been mostly harmful for Pakistan. FDI flows have traditionally been concentrated in consumption-based sectors like telecommunication, banking, packaged food and milk, soft drinks and toiletries.
In other words, one-time dollar inflows generate zero foreign exchange for the country. Multinational companies convert their rupee income into dollars in the local market and send the precious foreign exchange to their foreign sponsors 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 banking?” said Mr Zaidi.
Published in Dawn, July 24th, 2022
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FAQs
A strong dollar allows U.S. consumers to purchase goods and services from overseas for less than if the dollar was weaker. It also helps compensate for rising inflation by keeping purchasing power from dropping too much.
What happens to the economy when the dollar is strong? ›
A strengthening U.S. currency intensifies inflation abroad, as countries need to swap more of their own currencies for the same amount of dollar-denominated goods, which include imports from the United States as well as globally traded commodities, like oil, often priced in dollars.
How does an increase in the dollar affect the economy? ›
A weak U.S. dollar allows your export business to remain competitive in international markets. Conversely, a stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism.
What are the dangers of a strong dollar? ›
A strong dollar tends to raise the price of American exports and lower the price of imports, widening the country's persistent trade deficit—a bugbear of Mr Trump's for many decades.
What happens if the world stops using the U.S. dollar? ›
If the world stops using the dollar as its reserve currency, it could have a significant impact on the U.S. stock market. A shift away from the dollar could lead to a decline in demand for U.S. financial assets, including stocks. This could result in a decrease in stock prices and potentially lead to a bear market.
What has an affect on the strength of the U.S. dollar? ›
When demand for the dollar increases then so does its value. Conversely, if the demand decreases, so does the value. The demand for the dollar increases when international parties, such as foreign citizens, foreign central banks, or foreign financial institutions demand more dollars.
Is the dollar strong during a recession? ›
During times of economic stress, flight to safety means traders often need to liquidate market positions. Their go-to choice is often US Dollars, making it a haven-linked trading instrument. This influx of demand helps explain why the currency tends to rise during recessionary periods.
Who benefits from a strong dollar? ›
A strengthening U.S. dollar means it can buy more foreign currency than before. For example, a strong dollar benefits Americans traveling overseas because $1 buys more; however, this would disadvantage foreign tourists visiting the U.S. because their currency would buy less.
How to take advantage of a strong dollar? ›
Strong Dollar Investment Strategies: 8 Proven Tactics
- Explore Alternative Investments like Fine Wine. ...
- Adjust US Stocks to Small and Mid-Cap Companies. ...
- Invest in More Domestically Focused Sectors. ...
- Consider International Equities. ...
- Consider Currency-Hedged Versions of International Stock Indices.
A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
Other things equal, a stronger dollar makes U.S. goods relatively more expensive for foreigners, which benefits U.S. consumers of foreign goods (imports) and hurts American exporters and American firms that might not export but do compete with imports.
Does a strong dollar hurt stocks? ›
Besides hurting earnings, a super-strong dollar can also hurt prices of US stocks and bonds by making them more expensive for big non-US institutional investors.
What is the weakest currency in the world? ›
What Is the Weakest Currency in the World? The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
What to do before the US dollar collapses? ›
Though the U.S. dollar collapsing is unlikely, ways to hedge against it include purchasing the currencies of other nations, investing in mutual funds and exchange-traded funds (ETFs) based in other countries, and purchasing the shares of domestic stocks that have large international operations.
What countries are trying to get rid of the US dollar? ›
This is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade. Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar.
What countries are dumping the dollar in 2024? ›
BRICS inducted five new countries in January 2024 including Saudi Arabia, the United Arab Emirates, Egypt, Iran, and Ethiopia. Now, more countries have submitted applications to join BRICS and its de-dollarization mission.
Does a strong currency mean a strong economy? ›
Some countries have very strong currencies when the world economy is weak or politically unstable. These countries are called “safe havens” because that country is viewed as economically and politically stable. In other words, their currency is likely to recover from any turmoil going on.
What happens when an economy is strong? ›
In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets.
Is a weak dollar good for the US economy? ›
A strong dollar is generally a policy goal of the United States, with the American currency a global reserve currency used in international finance and trade. A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad.
Does high inflation strengthen or weaken the dollar? ›
Inflation decreases a dollar's value over time. This effect relates to the time value of money, which is a concept that describes how the money available to you today is worth more than the same amount of money at a future date.
