Recently the value of the rupee has gained some strength. This may be the beginning of a major change in the status of the world currencies because it marks the beginning of a long-term decline of the dollar. Since the beginning of the last century, America has made many innovations of new technologies such as the motor car, jet aeroplanes, nuclear reactor and computers. The US was exporting its hi-tech goods to other countries in large quantities. American exports were higher than its imports. America was accumulating huge stocks of gold to balance its external account.

Gradually, the American economy became the strongest in the world and the dollar became the world currency. Most of the international trade began to be denominated in dollars. A Pakistani exporter would denominate his exports in dollars though he was selling his carpets to a German firm.

The supremacy of the dollar was strengthened by the huge size of the American economy. Investors throughout the world began to recognize investment in American dollars to be the safest. Today the situation has changed dramatically. American economy is in a bad shape. American exports are facing tough competition from other countries.

Many developing countries have adopted the advanced technologies for producing the goods which America alone could produce in the past. Previously Thailand was importing cars from America; today America is importing cars from Thailand. As a result America is exporting less and importing more. The external account, however, is being balanced by capital inflows into the US. Purchases of US Treasury bonds by the developing countries to hold their foreign exchange reserves add to these capital inflows.

However, these capital inflows are not money earned by the US. They are merely loans which America will have to return in future. Yet America is using these capital inflows for financing its consumption.

This imbalance cannot be sustained indefinitely. There is an increasing chance that the value of American dollar is going to crash. The traders are quickly repatriating their foreign incomes so that they do not suffer from a further decline of the dollar. Likewise importers are delaying their business to benefit from a further decline in the dollar. One school of opinion wants the governments of the developing countries to maintain the previous lower value of their currencies so that the exporters don’t have to face difficulties. This may be good in the immediate sense but does not appear to be a good in the long run.

A weak currency is beneficial in the initial stages of economic development when the goods manufactured are not of international standards. Our industrialists can face the international markets only if their products are cheap compared to others. A decline in the value of the domestic currency was justifiable earlier. But the situation has changed now. Many Pakistani industries are now in a position to face the world market confidently. So they should not run for the cover of a weak rupee.

Pakistan can deal with the strengthening of the rupee in three ways. First, she may continue following the current policy of purchasing US Treasury bonds to maintain her foreign exchange reserves. The problem here is that the basic weakness of American economy will remain unmitigated. The practice of consuming goods with borrowed money, which the US is following presently, cannot go on indefinitely. As soon as the international investors realize the full import of the worsening trade balance of the US, they will start pulling their money out of America.

In that case the American dollar might have to face a situation similar to that faced by the Asian countries in 1997. Following which the value of the American bonds will be reduced and Pakistan government will incur heavy losses on its dollar holdings. The second option is that instead of purchasing dollars Pakistan government can start holding euros, Yens or other foreign currencies. In this option the fear of worsening American economy will subside. But the problem that America is facing today will surface in Europe or Japan tomorrow.

Eventually the unwise practice of lending our money to enable someone to purchase our goods will continue. Besides in face of declining value of the dollar the problem of selling Pakistani goods in the American market will persist. The third option is that Pakistan can jettison the policy of holding foreign currencies in large amounts. It can let the rupee strengthen itself and take hard measures to remain competitive despite an appreciation of the rupee.

The last option seems to be the only one, really. If Pakistan continues to buy dollars she will have to incur heavy losses following a decline in the value of US Treasury bonds. If she opts for purchasing euros instead of dollars it will merely be a case of exchanging one risk with another. Therefore Pakistan must face the situation boldly. She must tell her entrepreneurs that the time for weaker rupee is over and now they should rather concentrate their energy on improving the quality and efficiency of their products.