Drowning Pakistani Rupee against the US Dollar

Some of us may remember driving the old-fashioned gear drive car where the speed has to be built up gradually when changing gears - if you take the car into fourth gear before the vehicle is ready- it stalls. So, it seems that all attempts by the PDM government to revive the economy have actually stalled it. Underlying political uncertainty, floods, and an upcoming global recession will hit the country even harder. The Pakistani Rupee, which in August became a world top performer, is this month its worst performer as the positive sentiments of receiving IMF funds hit a hard wall of reality.


The Pakistani Rupee has nosedived against the US dollar in the last couple of months. There is no doubt that earlier COVID-19 restrictions, then political and economic instability combined with the recent catastrophic floods, have weakened the economy of Pakistan.

Since the economy was going through a rough patch, all eyes had remained on the revival of the International Monetary Fund (IMF) loan program to bring stability to the economy, including the exchange rate. In anticipation of the IMF approval in August, the Pakistani Rupee saw an 11 percent appreciation against the greenback and was one of the world’s best-performing currencies, reaching Rs. 213.

On August 29, the IMF Executive Board approved the much-awaited revival of its Extended Fund Facility (EFF) program, after which the cash-strapped country received the 7th and 8th tranches of $1.17 billion. However, the PDM government fulfilled very stringent preconditions to satisfy the IMF, which have stalled the economy, including raising petrol and electricity prices. Furthermore, friendly countries have not been so obliging in helping as they had done in the past.

Since September 1, the Rupee has been continuously depreciating daily, hovering at record lows at Rs. 239-240 against the greenback in the interbank market on September 21.

While the Saudi Fund for Development confirmed a rollover of a $3 billion deposit maturing on December 5, 2022, for one year, the impact of Saudi deposit rollover is not visible because the dollar-rupee parity is determined daily, and deposits are not used for financing imports. There is a shortage of dollars in the market. Rather the deposits are meant for boosting foreign exchange reserves to build confidence for debt maturity and the country’s debt servicing credibility.

The historical movement of the US dollar against the Pakistani Rupee has been a fluctuating yet continuously rising flight. Before the 1980s, the Pakistani Rupee had been relatively stable during the 1960s and 1970s, as the currency was under a ‘Fixed Exchange Rate Regime.’ During the 1970s, the rupee depreciation against the dollar had remained around 10 percent per annum. However, in 1982, Zia-ul-Haq, under his regime, shifted to a ‘Managed Float Regime’ where the State Bank of Pakistan could intervene in the value of the Pakistani Rupee against the US dollar to maintain the value of Rupee. However, huge dollar inflows due to the Afghan war saw the USDPKR relatively stable during this period.

The Pakistani government has often kept the dollar artificially at a higher rate. Between 2013 and 2017, Ishaq Dar continued to pump about 7 to 8 billion dollars into the market to keep the dollar value stable in the range of Rs. 100 to Rs. 105 gave a misleading vibrant picture of the economy. However, during the period of the PML-N government under Miftah Ismail as finance minister in 2018, the Rupee started its downward trend. On the eve of the last elections on July 25, 2018, the Rupee had already crossed the benchmark at Rs. 131 against the dollar and has continued to see generally an upward trend past two years.

The political uncertainty in the country in the past six months has not helped the Rupee. Immediately the foreign exchange markets saw a 2 percent depreciation when the opposition parties moved a no-confidence motion seeking the ouster of former Prime Minister Imran Khan on March 8. The Pakistani Rupee plunged from Rs. 178.13 to Rs. 181.73 against the US dollar shedding Rs. 3.60 (-2.02 percent), according to the data shared by the SBP.

On April 5, the Rupee plunged against the dollar to Rs. 185.2 in the interbank market. General secretary of the Exchange Companies Association of Pakistan, Zafar Paracha, called the day a “black day in the history of Pakistan .” On April 9, when Imran Khan lost a no-confidence vote, and the PDM government took charge, the dollar was quoted at around Rs. 186 in the open market.

Trickledown effect

Freefalling Pakistani Rupee against the greenback has a trickle-down effect. Pakistan lost heavily both as a seller and buyer and has made no good substitute for remedial changes in economic policies and developmental planning. In Pakistan, industries heavily depend on imported raw materials, such as the automobile sector, intermediate goods industry, etc. Continuous depreciation in the domestic currency combined with import restrictions (government not allowing LCs to be opened) has negatively impacted the auto industry of Pakistan, resulting in the cancellation of bookings and shutdown of production plants. There is common anticipation among the automotive industry’s analysts that there would be a 40-50 percent drop in sales compared to last year. High imported prices of intermediate goods have created a situation that has led to cost-push inflation, which has become a severe challenge at the micro and macro levels in the country.

Freefall of Pakistani Rupee against the US dollar

The Pakistani Rupee has maintained its collapse, mainly on account of the political and economic instability the country is experiencing. Considering the role of the central bank during the period of rapid exchange rate depreciation, SBP could not stabilize the exchange rate due to its dwindling foreign exchange reserves, affected by internal and external shocks, which stood at $8.238 billion by the week ended June 17, 2022. On September 9, 2022, SBP reserves reached

$14.32 billion, but numerous other factors are not letting the Rupee stabilize against the US dollar.

Political instability has put economic reforms at the backseat and encouraged speculative behavior. The Rupee is under pressure as the market is uncertain about the new setup and the decisions it will take to stabilize the economy. Moreover, political instability and change in policies, along with a change in the government, are making Qataris uncomfortable solely working with the government of Pakistan.

Notably, the consumption-driven economy of Pakistan has been grappling with a stubborn trade deficit for years. There is a direct relationship between consumption and trade deficit which causes depreciation. Recently, food imports hit an all-time high of $1,020 million in August 2022. This is expected to jump as the government removed duties on importing vegetables due to shortages in the local market after the devastating floods. According to PBS, imports in Pakistan increased to Rs. 133.4 billion in August from Rs. 107.25 billion in July 2022.

The export sector of Pakistan, the textile industry being the backbone, is performing below its potential. In July 2022, the trade deficit narrowed by 18 percent year-on-year to $2.64 billion. Even then, exports in July were recorded at $2.2 billion against $2.9 billion in exports registered in June 2022, showing a decline of $700 million, i.e., 24 percent, compared to the exports registered in June 2022. In August 2022, the export proceeds bounced back to $2.5 billion.

Common man suffers

Elite capture has created a situation in Pakistan in which many economic policies have been pursued the short-term benefit of the few at the cost of the longer interest of the country. The overpriced IPP contracts signed by earlier governments is a classic case of such policies which are now hitting the country. The common man’s suffering is being compounded by the soaring inflation, depreciating Rupee, and power crisis.

The Russia-Ukraine war has hit the global economy as both oil prices and wheat prices have jumped. In August, Pakistan’s inflation rose to a new high for the sixth consecutive month, with the devastating floods threatening to push prices even higher. Inflation hit 27.3 percent in August 2022 compared to 8.4 percent in August 2021 and 24.9 percent in July 2022. A 20 kg bag of wheat has jumped from around Rs. 900 to Rs. 1800 in some parts of the country.

Continuous depreciation has caused purchasing power of the Rupee to fall, and inflation has made it harder for the common man to meet his day-to-day needs. To receive the IMF funds, the coalition government has been forced to take back subsidies on many products and reimpose the petrol levy, causing the price of petroleum products to increase by over 66 percent.

Note: A slightly different version of this article appears in the 2022 September Magazine.

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