MONEY GROWTH, EXCHANGE RATE, WAGES AND INFLATION

  When money growth increases the exchange rate decreases. Decrease in exchange rate have now influence on real wages rate or we can say that the real wages are remain constant but the nominal wages are increases. Increase in nominal wages increases the inflation and thus yield the rises in the prices.

  In pervious fiscal year Pakistan faces some pressure on the exchange rate. As a result of the acceleration in economic activities the demand for imported machinery raw material and capital good has surged.

  But in the present fiscal year the exchange rate shows stable trend ranging between Rs.59.6266 per dollar in July 2005 to Rs.60.0218 in April 2006 representing a depreciation of rupees by 0.6 percent. The exchange rate in open economy remained stable with premium hovering around 1.0 percent.

  The inflation is measured by the consumer price index (CPI) for the first 10 month of the current fiscal year 2005-06 has declined to 80% from 9.3 % in the previous fiscal year. Food price inflation also declines from the 7.0% in current fiscal year as compared to 12.8% for the previous fiscal year.

  A decrease in the value of the rupee will entail a higher external debt, however, at the same time it will also make the exports more competitive. So Pakistan faces a trade off. A devalued currency will give rise to greater foreign exchange earnings but at the same time, the devalued currency will imply automatically higher debt too. Therefore, it is important that the exchange rate is managed between narrow bands and wide fluctuations are prevented. This entails that the State Bank of Pakistan intervenes by buying or selling foreign currency to maintain a stable parity of the Rupee against other currencies.

  Exchange rates, on average, showed a stable trend despite the widening of the trade deficit. Though State Bank of Pakistan continued to provide support for oil and commodities to the foreign exchange market, with a net cumulative injection of $1.4 billion dollar. December 2005, this net support was 35.1 percent lower on a Year-onyear’s basis. This shows signs of depth returning to the foreign exchange market, with the market mostly managing its flows in line with demand and supply factors, which is manifesting itself in healthy volatility rather than one-sided pressures on the exchange rate.

  The government’s tight monetary policy arrested the uptrend of core inflation and thus declining the core inflation pressured on the economy. Pakistan witnessed higher inflation for many reasons. The higher inflation trend in Pakistan over the last two years has been the outcomes of pressure that emanated from demand and supply sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level of income has increase the domestic demand and yields the rise in the prices of essential commodities. On the supply side the pressure emerged from a verity of factor, like increase in support price. Unable to produce the targeted level and mismanagement to supply yields the increase or upward trend in the prices.

  The sustainable high growth in the economy and increasing activities in the economy results a rise in the real wages of the labor group during the fiscal year 2006. The rise in the real wages on the other hand, shows strong demand for skilled and unskilled workers it suggest an increase in employment. The increase in real wages provides evidence of a rise in purchasing power.

 

(Muhammad Aamer Shahzad)

 

 

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