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Devaluation of Currency

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Devaluation of Currency Devaluation of Currency Subject: Global Economic Issues Presented to: Mr. Kamran Abdullah Presented By: Abdul Hameed Baloch BM-25011 Institute of Business & Technology, Karachi Institute Of Business & Technology (BIZTEK) Page 1 DEVALUATION OF CURRENCY TABLE OF CONTENTS S. No.Description ACKNOWLEDGEMENT PREFACE CURRENCY Institute Of Business & Technology (BIZTEK) Page 2 1.1 What Is Currency 1.2 Pakistani Currency 1.3 Role Of SBP DEVALUATION 2.1 Introduction 2.2 Devaluation In Modern Economies 2.3 Types Of Exchange Rate Systems 2.4 Country Devaluation 2.5 Effects Of Devaluation EXCHANGE RATE 3.1 SBP’s Policy About Currency 3.2 Exchange Rates FACTORS CAUSING DEVALUATION OF PKR 4.1 Balance Of Payment 4.2 Pakistan’s Balance Of Payment 4.3 Measures For Correcting Adverse BoP 4.4 Suggestions To Improve BoP 4.5 Depleting Foreign Reserves 4.6 Decreased Credit Rating 4.7 Law And Order Situation 4.8 Situation In Northern Pakistan 4.9 Proposed Remedy 4.10 Domestic Issues GLOBAL ISSUES 5.1 OVERVIEW 5.2 SUBPRIME 5.3 US, WAR ON TERROR, FOOD CRISIS AND MORE 5.4 DOLLAR AND CHINA CONCLUSION REFRENCES PREFACE The purpose of this study is to analyze the sharp drop in the value of PKR. The international crisis following the events of September 11, 2001 and the ensuing US attack on Afghanistan caught Pakistan in the crossfire, came with serious Institute Of Business & Technology (BIZTEK) Page 3 economic and political consequences for the country. With increasing number of refugees crossing the border, adverse Balance of Payments and deteriorating law and order situation, Pakistan is loosing the battle to maintain the strength of its currency which is devaluating at a helpless rate. Fast depleting foreign currency reserves which continue to fall at $800 to $900 million per month, flight out capital estimated $70 million per day, huge gap between import and export bill, mismanagement in privatization process, downgraded credit rating by International Rating Agency Standard & Poors and Moody’s, inflation rate floating more than 25 percent, heavy government borrowing to cover a budget deficit and $500 million euro bond debt obligation due in February are the noticeable factors in the erosion of Pak rupee. This study argues that internal as well as external factors are responsible for this nosedive. CURRENCY DEFINITION (1 ) Institute Of Business & Technology (BIZTEK) Page 4 A currency is a unit of exchange, facilitating the transfer of goods and/or services. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. Currencies are the dominant medium of exchange. Coins and paper money are both forms of currency. RUPEE (1) The rupee (sign: ₨; code: PKR) is the currency of Pakistan. The issuance of the currency is controlled by the State Bank of Pakistan. The most commonly used symbol for the rupee is Rs, used on receipts when purchasing goods and services. In Pakistan, the rupee is referred to as the "rupees", "rupaya" or "rupaye". As standard in Indian English, large values of rupees are counted in terms of thousands, lakh (100 thousand, in digits 1,00,000) and crore (10 million, in digits 1,00,00,000). Pakistanirupee (Urdu) روپیہ 1000-rupee note Coins of various denominations ISO 4217 Code PKR User(s) Pakistan Inflation 25% Source Federal Bureau of Statistics, September 2008 Subunit 1/100 paisa Symbol ₨ Coins Freq. used 1, 2, 5 rupees Banknotes Freq. used 10, 20, 50, 100, 500, 1000, 5000 rupees Central bank State Bank of Pakistan Website www.sbp.org.pk HISTORY The origin of the word "rupee" is found in the Sanskrit word rūp or rūpā, which means "silver" in many Indo-Aryan languages. The Sanskrit word rūpyakam means Institute Of Business & Technology (BIZTEK) Page 5 coin of silver. The derivative word Rūpaya was used to denote the coin introduced by Sher Shah Suri during his reign from 1540 to 1545 CE. The Pakistani rupee was put into circulation after the country became independent from the British Raj in 1947. For the first few months of independence, Pakistan used Indian coins and notes with "Pakistan" stamped on them. New coins and banknotes were issued in 1948. Like the Indian rupee, it was originally divided into 16 annas ( The currency was decimalized in 1961, with .(پاى) or 12 pie (پيس) each of 4 pice ,(آن the rupee subdivided into 100 pice, renamed (in English) paise (singular paisa) later the same year. However, coins denominated in paise have not been issued since 1994 COINS In 1948, coins were introduced in denominations of 1 pice, ½, 1 and 2 annas, ¼, ½ and 1 rupee. 1 pie coins were added in 1951. In 1961, coins for 1, 5 and 10 pice were issued, followed later the same year by 1 paisa, 5 and 10 paise coins. In 1963, 10 and 25 paise coins were introduced, followed by 2 paise the next year. 1 rupee coins were reintroduced in 1979, followed by 2 rupees in 1998 and 5 rupees in 2002. 2 paise coins were last minted in 1976, with 1 paisa coins ceasing production in 1979. The 5, 10, 25 and 50 paise all ceased production in 1994.There are two variations of 2 ruppee coins, most have clouds above the Badshahi Masjid but many don't have. This is noted by too less people. Currently Circulating Coins Depictio Depictio Value Year Compositio Front Back n (Front) n (Back) in Use n Illustratio Illustration n Re. 1 1948 - Cupro-nickel Crescent Floral (Old Presen and Star Wreath Version) t Re. 1 1998 - Bronze Quaid-e- Hazrat Lal (New Presen Azam, Shahbaz Version) t Muhamma Qalandar d Ali Mausoleum Jinnah , Sehwan Shareef Rs. 2 1998 - Brass Crescent Badshahi Presen and Star Masjid, t Lahore Rs. 5 2002 - Cupro-nickel Crescent 5 in a Presen and Star Pentagon t Institute Of Business & Technology (BIZTEK) Page 6 BANKNOTES In 1947, provisional issues of banknotes were made, consisting of government of India and Reserve Bank of India notes for 1, 2, 5, 10 and 100 rupees overprinted with the text "Government of Pakistan" in English and Urdu. Regular government issues commenced in 1948 in denominations of 1, 5, 10 and 100 rupees. The government continued to issue 1 rupee notes until the 1980s but other note issuing was taken over by the State Bank in 1953, when 2, 5, 10 and 100 rupees notes were issued. Only a few 2 rupees notes were issued. 50 rupees notes were added in 1957, with 2 rupees notes reintroduced in 1985. In 1986, 500 rupees notes were introduced, followed by 1000 rupees the next year. 2 and 5 rupees notes were replaced by coins in 1998 and 2002. 20 rupees notes were added in 2005, followed by 5000 rupees in 2006. All banknotes other than the 1 and 2 rupees feature a portrait of Muhammad Ali Jinnah on the obverse along with writing in Urdu. The reverses of the banknotes vary in design and have English text. The only Urdu text found on the reverses is the Urdu translation of the Prophetic Hadith, "Seeking honest livelihood is worship of God." The banknotes vary in size and colour, with larger denominations being longer than smaller ones. All contain multiple colours. However, each denomination does have one colour which predominates. All banknotes feature a watermark for security purposes. On the larger denomination notes, the watermark is a picture of Jinnah, while on smaller notes, it is a crescent and star. Different types of security threads are also present in each banknote. Banknotes before the 2005 Series Image Dimension Main Descriptio Value Status Obverse Reverse s Colour n - Reverse Institute Of Business & Technology (BIZTEK) Page 7 Tomb of 95 × 66 Muhammad Re. 1 Brown mm Iqbal in Lahore No longer Badshahi 109 × 66 in Rs. 2 Purple Masjid in mm Circulation Lahore Khojak 127 × 73 Burgund Rs. 5 Tunnel in mm y Balochistan Mohenjo- No longer Rs. 141 × 73 daro in printed - Green 10 mm Larkana Still in District Circulation Alamgiri No longer Rs. 154 × 73 Purple Gate of the printed - 50 mm and Red Lahore Fort Still in in Lahore Circulation Islamia Rs. 165 × 73 Red and College in 100 mm Orange Peshawar No longer printed - Green, The State Still in Rs. 175 × 73 tan, red, Bank of Circulation 500 mm and Pakistan in orange Islamabad No longer Tomb of Rs. 175 × 73 printed - Blue Jahangir in 1000 mm Still in Lahore Circulation The State Bank has started a new series of banknotes, phasing out the older designs for new, more secure ones. 2005 Series Image Dimension Main Descriptio Date of Value Obverse Reverse s Colour n - Reverse issue Gwadar port, which 115 x 65 Greenis is a mega July 08, Rs. 5 mm h Grey project in 2008 Balochistan (Pakistan) Institute Of Business & Technology (BIZTEK) Page 8 Bab ul Khyber which is the entrance to 115 × 65 May 27, Rs. 10 Green the Khyber mm 2006 Pass, Khyber Agency, FATA Mohenjo- 123 × 65 daro in August Rs. 20 Brown mm Larkana 13, 2005 District Mohenjo- Rs. 20 123 × 65 Orange daro in March 22, (Revised* mm Green Larkana 2008 ) District K2, second highest mountain of 131 x 65 July 08, Rs. 50 Purple world in m.m. 2008 northern areas of Pakistan Quaid-e- 139 × 65 Azam Rs. 100 Red mm Residency November in Ziarat 11, 2006 Rich Badshahi 147 × 65 Rs. 500 Deep Masjid in mm Green Lahore Islamia 155 × 65 Dark February Rs. 1000 College in mm blue 26, 2007 Peshawar Faisal 163 × 65 May 27, Rs. 5000 Mustard Mosque in mm 2006 Islamabad (*Recently the State Bank revised the Rs.20/- banknote, after complains of its similarity to the Rs.5000/-, which caused a lot of confusion and financial losses, when people gave out Rs.5000/- notes, thinking them to be Rs.20/- notes) Institute Of Business & Technology (BIZTEK) Page 9 DEVALUATION DEFINITION (1,2) Devaluation is a reduction in the value of a currency with respect to other monetary units.
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