It is interesting to note that the Group of 20 major economies has finally agreed to shun competitive currency devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects.
To manage the current account trade gap, the US is proposing the setting up of a target to rebalance global growth and realign or adjust exchange rates. There is a growing fear that the current economic recovery is brittle, as export growth in many developed and emerging markets is due to their weaker currencies, which may lead to protectionism.
In other words, the purpose of the meeting was to make a fervent demand for exchange rate management by trade surplus countries. These countries were required to make upward currency adjustments to enable countries with large trade deficit for the orderly return of the current account deficit to a sustainable level.
In 2008, the US Senate introduced a bill to accuse China of using unfair means by artificially keeping its currency Yuan undervalued, which also meant that China was manipulating its currency by subsidising its exports. The list is getting lengthier as Brazil, South Korea, Thailand, India, Russia, Germany and major oil producing countries are in surplus.
Any change in global currency strategy or trade policy is unlikely to have any major impact on Pakistan's economy because 80 percent of the country's trade is US Dollar-based, which is roughly USD 40 billion of the total trading volume. Strengthening of regional currencies such as Indian and Sri Lankan Rupee, Chinese Yuan, Thai Baht and BD Taka would give Pakistan a competitive edge over its trading partners because of a depreciating PKR - nuanced and substantive.
Out of the total USD 17 billion Pakistan's forex reserves, SBP's share is USD 13.2 billion of which 65 percent is IMF money and the remaining part consists of customer deposits and foreign currency borrowings. Central Bank is comfortable with its investments as it is hardly exposed to foreign exchange risk, as large part of its funds are placed in US Dollar. It has invested its funds in Securities, with Global Central Banks, with BIS headquarter and its branches. Pakistan's exposure to US treasuries is in the shape of a few million dollars, of course in USD. SBP and the board members of its investment team did a commendable job by allowing and placing bank's funds to earn a return of roughly 5 percent in a zero-interest rate environment.
Currency war is a term that was first used by the Brazilian finance minister. Basically it's a hype created by countries that are suffering due to their bad economic policies and now every country wants to extract a kind of political mileage by blaming the prospering countries. Though Brazil is differently placed, it fears that its currency the real (BRL), could have adverse impact on its exports. Its other worry is that a weaker US dollar could erode the value of its huge forex reserves placed in USD.
For the last three to four years, the US has been accusing China of using unfair means by artificially keeping Yuan undervalued, which also means that China is manipulating its currency by subsidising its exports.
About a couple of years ago, voices were raised against the increasing weakness of USD as there was a global shift in the composition of forex reserves from USD to euro and other currencies as Russia, China and some of the Middle Eastern countries were demanding a new reserve currency based on Basket of Currencies to replace a weak US dollar so that when USD drops the unit of others in the basket can serve as a hedge. Why is everyone keeping mum now?
Similarly, oil producing Middle Eastern countries that have their currencies' parity fixed to the USD were in a difficult situation as their oil earnings in US dollars were loosing their lustre (almost 50 percent of their trade is in currencies other than the USD) and were importing inflation due to weak USD and were unable to make currency adjustment due to their commitment of keeping their currencies fixed against US dollar parity.
So this topic is not new as a step back into history shows that in the 19th century Pound Sterling used to be the reserve currency. But after the Bretton Woods and establishment of IMF in 1944, a new exchange rate system was introduced and the US became the global economic leader, US Dollar backed by gold took over as the global forex reserve currency. But again in 1971, USD was clobbered as President Nixon decided to cancel, unilaterally, the direct convertibility of USD to gold that essentially ended the existing Bretton Woods system of international financial exchange. Until then gold was fixed at USD 35 per troy oz. Then one USD would fetch yen 360, GBP 0.42, Swiss franc 4.30, and Deutsche mark 3.60.
The real problem is hard cash. There is no genuine liquidity available in the global banking system. The advance nations are paying a high price of artificially maintaining high standards of living against their borrowings, which has created unmanageable debts. Frankly speaking, there is no money available to pay back and settle the debt, which is now ten-fold.
The current global financial survival is based on accounting adjustments and forceful rollovers of funds at maturity. Inflation is always attacked from the front, but in present times interest rates cannot be hiked accordingly, as this will result in an increase in interest accrual and there is no money to pay back the interest. Nor is there any hope for fresh incremental deposit, as demand exceeds supply.
Quantitative easing or low interest rates is an artificial mode, albeit temporary, of survival for the financial market. Food is expensive, global oil requirements are still maximum, gold and silver are at all time record high, items of daily use are sky-rocketing. So what is available on affordable prices? Why is there no financial collapse in absolute terms?
History tells us that this is an unending debate. Leaders of a country faced with economic difficulties are putting the blame on a prospering country or its trading partner. The only aim is to protect the rich. Blaming China for currency manipulation is a lame excuse, the US cannot afford to take strong action against China, as Yuan's consistent strength will give no respite to the US economy.
The US is surviving by printing more and more currency notes and through overseas borrowing. It has to impose huge taxes and prick the inflated values. Whereas, China has engaged the US in vendor finance, providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more and more goods with the purported ability to make choices free from fiscal constraints.
This is not a currency war; it is a game commonly known as passing the parcel. You scratch my back and I will scratch yours.
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