From what I remember is that exchange rates in Pakistan are not truly free float it is a mix of demand/supply and regulator; in accordance with SBP order of 1948 and further amendments SBP is the regulator for Forex. Exchange rates for a developing rather under developed economy like Pakistan have more considerations as compared to one liner wish list that dollar becomes cheaper and some thoughts on the matter are:
· Our exports mix is primarily focused on low cost cotton products (apparel, bedsheets, overalls, t shirts) with little or no RMG meaning we must spend less in dollar terms and export more in volumes to get maximum dollars. Major mix of export is focused on $6 /item products (ballpark) one of the major cost besides raw material/fixed cost is labor cost, which is almost fixed in PKR, however if the $ exchange rate comes down to say PKR120 major cost of the exporter will be labor thus he will not be recovering his overall cost and will not be able to compete in the international markets thus our exports will start declining again at least in this segment.
· Every country which has succeeded in developing an export based economy (barring mineral resource exports based economies) had done it by keeping their currency undervalued, means higher exchange rates vs dollar, Pakistan shouldn’t be any different.
· With a semi free float exchange rates, exchange rate is based upon sentiments of the people having major holding of dollars besides PPP value, in Pakistan speculators and currency exchanges, previous exchange rates of 160+ had more to do with speculators, everyone wanted to “invest” in dollars which was creating a demand/supply gap thus pushing the prices up, now it’s the other way round speculators and currency exchanges have sold over 2.5 billion dollars to SBP through respective windows.
· Lower exchange rates tend to encourage imports which at this point in time is not beneficial for Pakistan as we are still trying to manage our import/exports and our forex liabilities.
· I will not go into to the nitty gritty of economics but there is about $2 billion hot money invested in GoP paper as exchange rates decreases those vultures make more returns, first by investing in a risk free paper through IPS accounts with double digit returns, secondly with the principal and interest earned from GoP paper they will be able to buy more dollars if the dollar price has gone from say 155 to 150.
· As a nation we are very comfortable with hypocrisy and that too blatant, news channels are reporting Forex reserves as 16 billion plus whereas the actual are something like 8 billion plus minus, rest are deposits of banks and financial institutions and practically GoP cannot access those reserves unless it passes a stupid law like Noora did back in 98. We are in a better position when it comes to Forex reserves but we are not out of the woods yet, and for that we will have to start developing our exports beyond textile and labor.
· Nutshell I am less worried about exchange rates and more about the incompetent/apathic way in which inflation is being managed by the incumbent Govt.