http://blogs.thenews.com.pk/blogs/2011/12/09/we-make-it-the-‘mighty’-dollar/
We make it the “Mighty” Dollar
By Asif Ameer November 29, 2011
Money only holds value because there are goods and services available to buy with that money. It is the goods
and services that create a value for that money. Coconut water would be more valuable on a treasure island than
kilos of Gold. It's not the value of Coconut water that has increased, but the diminished value of Gold that's
reflected. Lesser the goods/services available, lesser the value of money – no matter if it's a pile of Gold.
Pakistan currently produces Cotton, Rice, Fish, Fruits, Vegetables, pulses and much more. These are the goods
that add value to the Pak Rupee. The Rupee is worth more as these goods produced in Pakistan increases. Instead
of selling these goods in Pak Rupee, which would create a “demand” for the Pak Rupee in the International
Exchange Market, the State Bank of Pakistan settles the export payments in US Dollar, called "Balance of
Payment" or BoP. Any country that imports from Pakistan would have to otherwise buy Pak Rupee from the
International Forex Market to pay for Pakistani Products. This may sound trivial but it takes the "value"
from the Pak Rupee away and transfers it to the US Dollar (think Petro-Dollar). The Pak Rupee becomes like
Gold on the Treasure Island – not much left to be bought with. A pretty sad thought that the very country that
grows the best of Rice, doesn't get to feed its own citizen that grow it.
Currently the State Bank of Pakistan uses Dollar and Euro to settle its BoP account. One should realize that the
value of Dollar and Euro is not static. Due to the Financial crises and socialization of the financial losses in the
banking sector, American and European Central banks have been running their printing presses on turbo mode.
The more the Central Banks prints or issue electronic credits to the markets, the more these currencies lose their
value. By using a foreign currency, not only does Pakistan's Economy import American Inflation but it also
results in Pak Rupee being devalued.
So why the dollar? This goes back to the Bretton Woods Agreement of 1944 when the Dollar was redeemable by
Gold. The American Central Bank, the Federal Reserve, could not print dollar bills if it didn't have the Gold to
back up the bills with. Eventually the "Gold Window" was closed in 1971 which should have marked the end of
the Bretton Woods Agreement but it didn't. After all, why should a sovereign country use a currency of a foreign
country when that currency can be devalued at the will of a foreign central bank as the dollar is no longer backed
by Gold? The whole idea goes against the concept of sovereignty. To add insult over injury, IMF lends loans in
dollar to fill the BoP gap, loans that have to be paid back with interest. The interest has to be earned by Pakistan
by exporting more of its goods. This is a double-edged sword. Interest sucks the value out of Import and dollar
inflation dilutes the value of Exports.
State Bank of Pakistan should demand payments for its exports be settled in Pak Rupee. But for the general public
to see the fruits of its labor, the Federal Government needs to stop printing Rupee and balance it's budget.
Otherwise the fruits of labour, that were saved from the International Bankers, would be stolen by the Federal
Government of Pakistan via inflation. It is high-time the Ministry of Finance takes notice of these issues as
Pakistan has already passed its point-of-no-return towards bankruptcy. Lets save whatever there is left to be saved
for future generations to come.
Asif Ameer trades equities, bonds and derivatives in the International Capital Markets. He can be reached via twitter @AsifAmeer _AP
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