Flight of dollar & economic crisis of Asia

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Muhammad Nadeem Bhatti

In this world, the United States dollar is considered the most power currency. It’s role as the primary reserve currency for the global economy allows the US to borrow money more easily 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 transactions globally. Some other value-added currencies include Euro, British Pound, Chinese Yuan, Saudi Riyal, and Japanese Yen.

According to the IMF (International Monetary Fund), the US dollar is the most popular one. According to 2019, it makes up more than 60% of all the foreign exchange reserves. But the question is; what makes Dollar so powerful that out of 197 countries in the world, 193 trade specifically in it.

The economy’s performance 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 the demand for dollars can often persist despite fluctuations in the performance of the U.S. economy.

When the U.S. exports services or products, it creates a demand for dollars because customers need to pay in that. Consequently, they will have to convert their local currency into dollars by selling their own currency to pay their bill.

Additionally, when the government of US or a large American corporation issue bonds to raise capital that is then purchased by foreign investors, those payments will also have to be made in dollars. This too applies to the buying of US corporate stocks from non-American investors, needing the foreign investor to sell their currency to buy dollars to purchase those stocks.

These examples show how the U.S. creates more demand for dollars, and that in turn puts pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars.

The dollar is strong for a 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 following the Great Recession. That move constrained the supply of the dollar, which had the effect of increasing its value.

Second, the Fed also raised interest rates in December 2015, which strengthened the value of the dollar further. A rise in interest rates has the effect of lowering bond yields, which reduces investor interest in U.S. Treasury notes in the short-term. This increased the demand for dollars and let savers earn a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.

Sri Lanka is in a deep humanitarian and economic crisis. Also, its central bank is running dangerously low on foreign currency reserves. Shortages of medical supplies, skyrocketing prices, and power outages have become common in the entire country. Poor policy decisions and the pandemic are partly to blame.

Another reason has to do with the U.S. 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 the US tourists visit the island for vacation, they swap their U.S. dollars for rupees which then flow through the Sri Lankan banking system.

And then this treadmill of taking on new debt to pay off older debt – it was mostly fine before the pandemic. But then credit ratings agencies downgraded Sri Lanka. They were concerned the country was too risky to be a good borrower.

Sri Lanka lost its access to international markets and couldn’t sell any more bonds. Currently, the country is facing severe economic challenges and crisis because of the decrease in their currency’s value and tourism.

Talking about the situation of Pakistan, the FBR is making passive policies that are doing so hard but destroying the economic conditions of the country by collecting excess of taxes.

The government has banned all the imports and on the same day, FBR imposed 10% taxes. The public of our country is poor but they cannot escape taxes and they’ll have to pay them off by hook or by crook. But the thing is; if this situation continues, Pakistan will no longer be able to develop and keep pace with other developed countries.

The passive policies of FBR are pushing the country back to the stone ages. Th inflation is at its peak, petrol prices are record high and still the institution is imposing new taxes every day. The Chief Justice of Pakistan (Honourable Umar Ata Bandial) should take a serious action against the FBR and all the withholding & sales taxes should be reduced to 50%.

Pakistan is a struggling developing country which cannot afford its political leaders and bureaucrats to live such a lavish life.

How can you imagine a country to be developed where a 17-grade assistant commissioner comes in a vehicle worth 9 million in a week to watch the prices of vegetables? Isn’t it unfair to the public of the country in which mostly are salaried individual and lower middle class? All the luxuries given to ministers and bureaucrats are charged from the pockets of a common man.

According to me, the bureaucratic system should be suspended from our system as we cannot afford to give them houses with two swimming pools. Also, the FBR, should cut down taxes on all business owners.

How can a person give 17% tax from their salaries? We demand a fix tax and policies should be made in favor of our country and not in the favor of investors and politicians. We hope that if actions were taken, Pakistan will again come to the track of economic growth and development.

This is time for all the leaders to sit and think together for the betterment of our country instead of their personal interests.

—The Writer is a Senior Social and Economic Analyst Can be found at [email protected]

 

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