Pakistan could be collateral damage if US, China enter ‘currency war’

Published: January 26, 2018
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The depreciation of the US currency would make the British pound sterling and euro more expensive. The euro has already climbed to its strongest against the dollar since 2014. PHOTO: REUTERS

The depreciation of the US currency would make the British pound sterling and euro more expensive. The euro has already climbed to its strongest against the dollar since 2014. PHOTO: REUTERS

SWITZERLAND / DAVOS: As the US raises prospects of entering into a ‘currency war’ with China, Pakistan is likely to face new challenges of further losing its competitiveness in the global market, while also witnessing further pressure on its import bill.

In order to improve its trade balance with China, the US, led by its mercurial president Donald Trump, has implicitly decided to allow its currency to weaken. The move is aimed at making its products cheaper and competitive in the global market, a place dominated by Chinese merchandise. While China is not one to sit out, a currency war likely seems to be on the cards, carrying far-reaching implications for the global economy, including Pakistan.

The dollar saw its worst day since March 2016, after Treasury Secretary Steven Mnuchin said a weak dollar would help US trade.

The dollar index, which reflects the greenback against a basket of currencies, fell 1% to the lowest level since December 2014, according to the CNBC.

Mnuchin spoke at the World Economic Forum (WEF) during a session on ‘Remaking of the Global Finances’, stating that a weak dollar is good for the US.

He said that he spends little time thinking about dollar’s weakness over the short-term. “In the longer term, we fundamentally believe in the strength of the dollar,” he added.

Speaking during a CNBC-moderated panel at the WEF in Davos, Mnuchin said dollar weakness in the short-term was “not a concern of ours”.

He further said that while he acknowledged the greenback’s weakness in the short-term would create issues for some, it would be “beneficial” for some US trade imbalances.

The US currently faces a trade deficit of over $43 billion as on November 2017, putting pressure on its foreign currency reserves that are hovering over the $120-billion mark.

The comments are also seen as a departure from the past three presidential administrations and Treasury secretaries.

The depreciation of the US currency would make the British Sterling Pound and Euro more expensive. The euro has already climbed to its strongest against the dollar since 2014.

Pakistan context

Since Pakistani exporters price their goods in dollar terms, they would lose the competitive edge in the British and European Union markets. Not only that, the depreciation of the rupee versus other currencies would make international commodities more expensive that will further increase Pakistan’s import bill.

LNG imports would also get expensive as the price of crude oil goes north.

In case, Pakistan depreciates its currency to make it competitive, this will increase its debt burden.

“Pakistan’s debt will increase in dollar terms if the currency war goes too far,” said Dr Ashfaque Hasan, a noted economist and dean at the National University of Sciences and Technology. “When the dollar loses value, we will import more and our import bill will increase further. This will also put renewed pressure on the rupee.

“Our exporters will also find it difficult to increase their earnings.”

Global economy

While speaking at the occasion, International Monetary Fund (IMF) Managing Director Christine Lagarde said that currently, the global economy was standing at a sweet spot. The global economy growth is moving at a pretty solid rate of around 3.9% and this momentum is expected to continue next year as well. About 120 countries have seen growth in per capita income during the last one year, she added.

The financial conditions are reasonably accessible and the engines of global growth are the investment and the growth in international trade, said the MD, adding that international trade is growing at a faster rate than the global economic growth rate.

“So any measure that would slow down the global growth rate, that would try to limit the strength of this engine, would obviously be a matter of concern for the IMF,” said Lagarde.

To a question whether the IMF agrees with tariff escalation by the US, Lagarde said that no one would agree with measures that restrict growth.

The US treasury secretary, Mnuchin, said that the US wanted reciprocal fair trade, adding that productive conversations have been held with China on free trade, increasing exports and participation of US companies in China in an open and fair manner.

Published in The Express Tribune, January 26th, 2018.

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Reader Comments (10)

  • Humbal
    Jan 26, 2018 - 9:06AM

    It is not about What Pakistan will Opt for, but it also state that even U.S import and foreign currency sheet is not balance, So the any other country eventually importing Chinese product will automatically accepting it.Recommend

  • Shoaib Khan
    Jan 26, 2018 - 9:23AM

    Pakistan’s nukes are India’s worst nightmare lolRecommend

  • Travis L
    Jan 26, 2018 - 10:28AM

    One of the basic tenets of sovereignty apart from borders is having your own economy and monetary system. Looks like Pakistan is looking for somebody from the outside to rule it.Recommend

  • Salman
    Jan 26, 2018 - 10:55AM

    I disagree particularly with the notion that a depreciating dollar will make Pakistani exports to the UK/Europe less competitive.

    Assuming that the USD/PAR rate is maintained, to the contrary, our prices will be more competitive, particularly as the commodities or the products based on these commodities are domestically produced.

    I think that the analysis is flawed. Recommend

  • Wizarat Rizvi
    Jan 26, 2018 - 10:59AM

    It is over 70 years that Pakistan was created and they still have to rely on others whether Pakistan or China to feel safe. The leaders of Pakistan have never done anything for the benefit of Pakistan but always for “what is in it for me”. the results are there for everyone to see. The 2 major political parties, PPP and PMLN have ruled over Pakistan (16 yrs PPP & 14 by PMLN) The only progress we have seen are in the form of Panama Papers etc and the Swiss money laundering by Zardari.

    It is a shame that Pakistan is where it is and unless they fix their own house by banning all imports and improve their economy things would get much worse. It will not hurt the Sharifs and Zardaris and Bhuttos, it would decimate the public. Recommend

  • Ali
    Jan 26, 2018 - 11:23AM

    Shocked at the quality of reporting here! If the US dollar weakens, and PKR remains pegged to USD, our exporters will greatly BENEFIT from it. The writer needs to take a course of Finance 101.Recommend

  • Balachandran
    Jan 26, 2018 - 1:22PM

    Mr Ali you haven’t understood the point. If the Dollar becomes weak, the European Union will ask to pay Pakistanis in Euro, the exchange rate will be very high against Pakistani rupee and you will find it difficult to pay in Euro.Recommend

  • Citizen26
    Jan 26, 2018 - 1:42PM

    Prices are determined by law of demand and supply. If USD will get devalued then impact will be on all the exporters who deal in USD prices globally. Fluctuations in FX rate will be a common problem for everyonebso not a big issue. Real issue is that our producers are not efficient and don’t invest in improving quality or in Research and Development. This is the core issue. Recommend

  • Abdullah
    Jan 26, 2018 - 4:59PM

    Falling dollar will reduce our import bill as our main import is oil and it’s derivatives, our imports are more significant than exports so the net effect should be positive, further, textile exports might suffer as their competitiveness would decrease unless we can export textiles to new markets such as Russia, China, Iran, Iraq, Morocco, Oman, etc. and reduce reliance on US market.

    Weaker dollar is also positive as it will make US military industrial complex less able to create trouble in the region. Their funding and support to corrupt regimes will become more expensive.Recommend

  • Ties
    Jan 26, 2018 - 9:47PM

    It will be hard to have a currency war when America has no currency left and China is loaded. Russia and China have most of the worlds gold supply…Unless we can convence the world our paper is worth more than gold.Recommend

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