There are states, Venezuela & Zimbabwe, who in recent times have seen severe economic crises with hyperinflation & also the vertical downfall of currency depreciation. While the indications were similar, the way they got into this was differing.
One of them, the oil-rich Venezuela, arbitrarily declared one fine day that the Bolivar (their local currency) was equal to the US Dollar. Clearly, no one was ready to accept that and discarded Bolivar in such a huge quantity that the economy went down into a tailspin from which it still hasn’t recovered.
Zimbabwe introduced abrupt & often violent land redistribution & reforms. This disrupted the economy in more than one way, and exports suffered. The government tried to address this by having several rounds of devaluation, which didn’t work, and productivity kept dropping. The currency was devalued to such an extent that the currency became worthless, after which the government introduced a new currency. That, too, didn’t work…
Two Extreme Approaches
Venezuela insisted on fixing the currency, while Zimbabwe seemed content with endless devaluation. These two extreme point of views highlight the impracticality of either strategy, emphasizing the need for a flexible, data-oriented approach. Though their methods differed, the root cause of the crises remained the same: distrust and a loss of credibility.
Challenging times ahead for PKR
This is because the traders are now factoring in a 5-10% depreciation of PKR next fiscal year as Pakistan suffers from almost near zero growth, very low productivity, and growing repayments with fewer avenues for raising forex reserves for trade.
In the current situation, the economy is grappling with a lackluster in imports (fresh LC openings) and a cut in both exports and remittances, drawing a stifling effect coupled with persistent higher inflation. However, a bigger challenge has been seen: allowing the Rupee to fall down could trigger a second round of spiraling inflation, posing a potential and tough with back-breaking income and price burden for all classes of the economy.
Inflation Emerges as a Key Challenge
Average inflation for the first five months (Jul to Nov) is 28.62%, and if the SBP’s target of 22% for the whole year were to be considered, this would mean average inflation for the coming seven months to be lower than 17%. This looks highly unlikely as a mean consensus for the remainder of the year is 22.50% – a whole 5% above SBP expectations.
What needs to be done
The 2 top things the authorities need to do is go all out to 1. To Generate opportunities for forex liquidity, most probably the Army Chief’s visit might prove to be productive and fruitful in this case 2. Use administrative measures – several types of danda – to curb unchecked price inflation, including food, transport, fuel, etc. And also to pray and seek for oil to come down to $60 per barrel or lower.
Apart from a lack of confidence & and a cut in credibility, the one other shared factor in Venezuela & Zimbabwe was political instability. This issue cannot be left unspoken about.
Fed Surprises Markets
The end of the interest rate upsurge cycle looks imminent, even though it hasn’t been publicly declared. This is evident from Powell’s statements, stating: “Committee members no longer see further interest rate hikes as appropriate, but they are also not ruling out such a possibility.” Though there’s still a marginally open policy for a return to swell, the likelihood is lesser and based upon a black swan happening. This sentiment is backed by the Fed’s dot plots, which indicate a robust inclination towards interest rate slashing in the upcoming calendar years.
Bonds Buying picks up
More than anything, the Fed gave the all-clear that it may be okay to move back into bonds again. This caused yields to drop, with the Fed likely to target 10-year paper to consolidate at the 4% level. It wants financial conditions to ease to keep the economy from going into recession as those effects of tightening take effect.
Gold & Dollar Index
By the end of the week, there was renewed interest in buying Gold, which should test its earlier high of $2,100 and most likely overtake it. Moreover, the Dollar index also suffered as EUR, GBP & several other currencies’ values went up.
