The economy of the United States, inflation, and the ramifications for Pakistan

 The high US inflation rate will undoubtedly have an influence on the world.

The US Consumer Price Index (CPI) inflation rate is at 9.1%. The predicted high rate of headline inflation is likely to persist for some time due mainly to supply interruptions brought on by oil and food price hikes as a result of the Ukraine war, even though core inflation, or inflation excluding the prices of oil and food, is lower at roughly 4%. Compared to the first quarter of 2021, when growth was 5.6%, the growth rate in 2022 was only 1.6%. The consensus among economists is that there will be a US economic recession and a global slowdown. In terms of growth, exports, employment, and the value of their currencies, these developments will have an impact on economies all around the world, but particularly on those in developing countries. Let's now examine the dollar-rupee parity.

 

The elevated US inflation rate will undoubtedly have an effect on other countries, especially less developed economies like Pakistan which are heavily dependent on the US economy for their exports and their currency. The US Federal Reserve raised interest rates to about 2% to curb inflation and calm the economy. Until inflation is reduced to at least 4%, this growth is likely to persist. Although the Fed intends to keep inflation at 2% in theory, in fact, 4% is the acceptable norm, as it was in the 1980s under President Reagan when it had reached levels of 11–12%.

 

The United States' rising interest rates increase the profitability of investments in treasury bills and bonds, which boosts the value of the dollar relative to other currencies. The US dollar has increased in value relative to the euro in recent months, rising from 0.98 to 1.20, an increase of around 12%. The Pakistani rupee's value has decreased since it is pegged to the US dollar, although other factors have contributed to this decline as well. The rupee has lost over 36% of its value against the dollar in recent months. Out of this, almost 12% of the rupee's decline can be attributed to the strengthening dollar.

 

The high current account deficit, primarily brought on by high food and oil prices, particularly as a result of supply disruptions, low exports, the depletion of our reserves as a result of a foreign exchange cash flow imbalance, the uncertainty surrounding the resumption of the IMF assistance package, and political unrest are some additional factors that have contributed to the rupee's decline. The strengthening of the dollar due to an increase in interest rates in the USA will still have an impact on the value of our currency, even if these other factors get better. Due to severe import restrictions and increased possibilities of an IMF package renewal by the end of August, the rupee has recently recovered to roughly Rs218 from as high as Rs239 to the dollar two weeks ago.

 

The high rate of domestic inflation, which is mostly the result of increased import costs, has also led to a decline in the rupee's dollar parity. Although the State Bank's raising of the interest rate may raise the profitability of government treasury bills and bonds, the economy's inherent unpredictability deters outside investment in bills, bonds, or equities. Under normal circumstances, this could have lessened the rupee's negative pressures, but given the dreadful external situation, which is made worse by the large budget deficit, this redeeming component does not have the desired impact. We have, over the years, more or less, been pursuing a policy of a managed float, regulating the price of the US dollar to keep it in a certain bandwidth as opposed to the free float of the dollar price mandated under the ongoing IMF agreement, letting the price to be determined by the market forces of demand and supply. The main reasons for doing this were to prevent and safeguard the economy and consumers from high inflation rates and to encourage investment by maintaining a low-interest rate.

 

Such a financial policy is typically pursued by economies that are rising or that are relatively weaker. India has long followed this strategy, while China rigidly keeps the Yaun rate within a reasonable range about other currencies to maintain the competitiveness of its exports on the global market, maintain strong growth rates, and firmly control internal inflation. Mahathir Mohammad of Malaysia resisted pressure from the outside during the East Asian financial crisis of the 2000s to weaken the ringgit. Following such a program could cause foreign exchange reserves to be depleted; if imports vastly outpace exports, this could cause a current account crisis and reserve collapse. Developing nations struggle to strike a balance between the risk of a currency crisis and employment, low inflation, and economic progress. The recurring boom-bust cycle must therefore be ended on a sustained basis, which is frequently recommended by deep economic structural reforms.

 

In the end, a nation's currency value is determined by the health of its economy and the resilience of its democratic system. This includes the degree of productivity in the industrial, agricultural, and service sectors as well as their revenues, exports, employment rates, infrastructure, information technology, and the roles of women in society and the economy. Political parties, aggressive government, a strong and free press, and a mature legal system all play important roles in the political realm.

 

While these must continue to be the long-term goals of our economic development and human growth, the short-term effects of the fluctuating inflation and interest rates in the USA will still be felt domestically in this country. Only genuine economic independence and viability will be able to protect our currency from negative external pressure.