Downward spiral of rupee continues

Pakistan’s shattered economy limped into 2023 with a precipitous drop in the Rupee’s value against the US dollar. The Pakistani Rupee is seeing its worst decline in decades. Since April 2022, the Pakistani Rupee has lost Rs.103 against the US dollar, dropping from Rs.175 to currently trading around Rs.278. January 26, 2023, saw the biggest one-day drop in the official rate of the Rupee in over two decades, a 9.6% drop, falling from Rs. 230.90 to 255.40. The most significant decline since 1999 in both absolute and percentage terms.


In a country that imports more than it exports, given many of these, are essential imports, the value of the USDPKR is not of theoretical importance to the average citizen. It determines the price of the petrol or diesel they buy for their motorcycles or rickshaws; depreciation in the Rupee makes foodstuffs more expensive, including palm oil, wheat, and other grains and pulses, including dahls, which is the staple diet for the poor. Pakistan’s largest export industry, textiles, often end up importing cotton as well; this year, due to the Monsoon floods of 2022, an estimated 8-10 million cotton bales will have to be imported to keep the textile sector spinning.

In the last several months, the financial markets and various economic stakeholders have become increasingly concerned that Pakistan’s economy could quickly spiral out of control, just like Sri Lanka. As Pakistan’s debt payments came due, understanding that the country lacked foreign exchange reserves, fears of default compounded the downward spiraling of the Rupee. According to a research note by Arif Habib Limited, the first significant depreciation of the Rupee versus the dollar began in April 2022, following a vote of no confidence that resulted in a change of government. Foreign investors’ and creditors’ confidence suffered due to the accompanying political risks, significantly impacting the Rupee’s value.

The financial crisis reached its initial peak in September last year when the PML-N government chose to replace its economic czar, Miftah Ismail, with Ishaq Dar, who returned to the nation after five years of self-imposed exile in London to play what the PML-N party thought would be a pivotal role in the country’s recovery. The former three times finance minister, who held the finance portfolio during 1998-99, 2008, and 2013-17, maintained the value of the Rupee around Rs.105 for close to four years last time he was Pakistan’s finance minister. Before Dar landed in Pakistan at the end of September 2022, he made remarks on the speculative activity being responsible for the Rupee’s depreciation and announced, “I will fix these things.”

Read more: Ishaq Dar seeks Allah’s help in saving economy of Pakistan

He was famous in his earlier tenures for strongarming the central bank to liberally inject foreign exchange into the market to prop up the Rupee. The problem is this time, the State Bank has no FX reserves to do this and is now technically independent of the finance minister after the IMF imposed this condition on the PTI government in 2021. Official records show that the highest amount of the SBP’s injection of funds into the foreign exchange market to maintain the value of the Rupee was from October 2016 to June 2019 – during this period, the SBP poured $20.7 billion into the interbank market, the vast majority of it during the PML-N government’s period.

Pakistan losing control of economy?

However, hours before Ishaq Dar’s arrival, the Rupee made enormous gains immediately, surging by 1.11% versus the US dollar in the interbank market. As Dar assumed control of the finance ministry, the Rupee fleetingly steadied versus the dollar, initially gaining around 9% for approximately three weeks, until the underlying causes kicked in again, and the Rupee started declining. Pakistan’s finance minister had done nothing to control the underlying reasons causing depreciation: high inflation worsened by the devastating floods, a widening current account deficit, falling reserves, and still no sight of an agreement with the IMF to resolve its fiscal position. Walking the talk proved to be tough, and by November 2022, USDPKR ended at Rs. 220.64.


In December 2022, the value of Pakistani currency in the interbank market fell below 225 versus the US dollar due to a growing imbalance between demand and supply. The downward trend prompted people to invest their money in gold to lessen the effects of the Rupee’s depreciation when inflation was high. Although following the rupee depreciation, gold prices in the domestic market skyrocketed to all-time highs of Rs 202,500 per tola.

The one-day drop on January 26, 2023, came a day after foreign exchange companies removed a cap on the exchange rate. The Exchange Companies Association of Pakistan (ECAP) abolished the cap on the US dollar to stop “artificial” demand in the market after IMF pressure came to liberalize the foreign exchange market. Currently, the currency is still hitting record lows every day.

Read more: Pakistani Rupee plummeting into the abyss

Contrary to its mandate set in 2021 of leaving the exchange rate market free of intervention, Pakistan’s central bank has recently enforced an unofficial exchange rate for money changers that kept the Rupee artificially high. Due to its severe balance of payment issue and urgent need for outside financing, Pakistan could not avoid complying with the IMF’s request if it wanted to avert default. Pakistan received a $6 billion IMF bailout in 2019, and an additional $1 billion was added to help the country recover from severe floods the previous year. However, in November 2022, the IMF stopped making payments since Pakistan has yet to make progress toward fiscal restructuring.

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