Rising value of dollar sees Pakistan’s external debt increase by Rs3 trillion

As the government’s decision to allow the exchange rate for a single US dollar to be determined by market forces in line with demands by the International Monetary Fund (IMF) takes hold, many are concerned about what that would mean for the mountain of external debt that Pakistan has and needs to pay off in the coming years and the cost of imported items.

In the open market on Thursday, the cost of a single US dollar rose past Rs255 from Rs230.89 a day before– a single-day increase of Rs24 after the government removed the cap on the rupee-dollar exchange rate.

Debt trap?

One impact that Pakistan faces because of this massive surge is the increase in the external debt, in terms of rupees, that it has to pay. Hence, it is also the additional money that Pakistan will have to raise to repay the debts.

Now, if the cost of a dollar increases by even a rupee, the additional money it will have to raise to repay its debts would increase by around Rs130 billion.

Economic experts said that an Rs20 increase in the price of a US dollar in a single day means that Pakistan’s external debts increased by a whopping Rs2.5 trillion.

This single-day increase accounts for around 26.3% of the last fiscal budget of Rs9.5 trillion.

But if you were to calculate the rate at Rs255, which was an increase of Rs25 – an actual increase of the US dollar in the interbank on Thursday – it would mean that Pakistan’s debt increased by Rs3 trillion (31.6%) in a single day.

Should dollar value be uncapped?

Economists lean towards the argument that given the current economic crisis, the dollar should be left to trade on market’s demand and supply forces.

Moreover, it is one of the basic conditions set by the IMF to resume its program.

But the government artificially froze the value of the US dollar in the interbank and open markets. As a result, a black market for US dollar came into being and all transactions started being conducted there.

Experts say that there is no harm in keeping the value of the dollar market-based.

But after this move, the dollar will exhibit some unusual behavior for a day and a half before settling on its market equilibrium price.