Leakage of the dollar and the Asian economic crisis
Muhammad Nadeem Bhatti
In this world, the US dollar is considered the most powerful currency. Its role as the primary reserve currency for the global economy makes it easier for the United States to borrow money and impose painful financial sanctions.
Since the end of World War II, the dollar has been the world’s most widely used currency for international trade and other global transactions. Some other value-added currencies include the Euro, British Pound, Chinese Yuan, Saudi Riyal, and Japanese Yen.
According to the IMF (International Monetary Fund), the US dollar is the most popular. As of 2019, it represents more than 60% of all foreign exchange reserves. But the question is; which makes the dollar so powerful that out of 197 countries in the world, 193 trade specifically with it.
The performance of the economy is at the heart of the decision to buy or sell dollars. A US dollar is considered a safe haven during times of global economic uncertainty, so demand for dollars can often persist despite fluctuations in the performance of the US economy.
When the United States exports services or products, it creates a demand for dollars because customers have to pay. Therefore, they will have to convert their local currency into dollars by selling their own currency to pay their bill.
Moreover, when the United States government or a large American corporation issues bonds to raise capital which is then purchased by foreign investors, these payments will also have to be made in dollars. This also applies to the purchase of US company stocks from non-US investors, requiring the foreign investor to sell their currency to buy dollars in order to buy those stocks.
These examples show how the United States creates more demand for dollars, which puts pressure on the supply of dollars, increasing the value of the dollar against currencies sold to buy dollars.
The dollar is strong for the following reasons. First, the Fed took two actions: it ended its expansive monetary policy (adding to the money supply) as the economy continued to improve after the Great Recession. This decision limited the supply of the dollar, which had the effect of increasing its value.
Second, the Fed also raised interest rates in December 2015, which further strengthened the value of the dollar. A rise in interest rates has the effect of lowering bond yields, reducing investor interest in short-term US Treasuries. This increased the demand for dollars and allowed savers to earn a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.
Sri Lanka is going through a deep humanitarian and economic crisis. In addition, its central bank is dangerously short of foreign currency reserves. Shortages of medical supplies, soaring prices and power outages have become commonplace across the country. Bad policy decisions and the pandemic are partly to blame.
Another reason has to do with the US dollar. It was during the pandemic that Sri Lanka’s problems really started to snowball. In 2020, the economy shrank 3.6%, and a big part of that was the disappearance of tourism, which brings in billions of dollars every year. The country’s local currency is the rupee, and when American tourists visit the island for vacation, they exchange their US dollars for rupees which then pass through the Sri Lankan banking system.
And then that treadmill of taking on new debt to pay off older debt — that was usually way before the pandemic. But then credit rating agencies downgraded Sri Lanka. They feared the country was too risky to be a good borrower.
Sri Lanka lost its access to international markets and could no longer sell bonds. Currently, the country is facing severe economic challenges and crisis due to declining value of their currency and tourism.
Talking about the situation of Pakistan, the RBF is doing passive policies which are doing so hard but destroying the economic conditions of the country by collecting excess taxes.
The government banned all imports and on the same day, FBR imposed 10% taxes. The people of our country are poor but they cannot escape taxes and will have to pay them willingly or by force. But the thing is; if this situation continues, Pakistan will no longer be able to develop and keep pace with other developed countries.
FBR’s passive policies push the country back to the Stone Age. Inflation is at its peak, oil prices are at record highs and yet the institution imposes new taxes every day. The Chief Justice of Pakistan (Honourable Umar Ata Bandial) should take serious action against the FBR and all withholding taxes and sales taxes should be reduced to 50%.
Pakistan is a struggling developing country that cannot allow its political leaders and bureaucrats to live such a lavish life.
How can you imagine a developing country where a 17-grade deputy commissioner comes in a vehicle worth 9 million in a week to monitor vegetable prices? Isn’t this unfair to the public of the country in which there are mainly salaried individuals and lower middle classes? All the luxuries given to ministers and bureaucrats are taken from the pockets of an ordinary man.
In my opinion, the bureaucratic system should be suspended from our system because we cannot afford to give them houses with two swimming pools. In addition, the FBR should reduce taxes for all business owners.
How can a person give 17% tax on his wages? We demand a fixed tax and policies should be made in favor of our country and not in favor of investors and politicians. We hope that if action is taken, Pakistan will return to the path of economic growth and development.
It is time for all leaders to sit down and think together for the good of our country rather than for their personal interests.
—The author is a senior social and economic analyst Can be found at [email protected]