Currency Crisis

The recent plummet of the Pakistani rupee against the US dollar, resulting in a significant surge in the dollar’s value, is an alarming development that has raised questions about the nation’s economic stability. Currency experts attribute this decline to various factors, with some pointing to supply and demand dynamics, while others accuse banks of profiteering by increasing dollar rates. Regardless of the cause, this abrupt depreciation has sown seeds of uncertainty, particularly among importers and exporters.
This currency crisis carries profound implications. The local economy is at risk of facing imported inflation, potentially necessitating an increase in the central bank’s key policy rate, currently at a record high of 22%. Unchecked dollarization, the illicit flight of capital from the country, and the activities of illicit hawala-hundi operators have all contributed to the rupee’s depreciation. The State Bank of Pakistan data reveals a consistent decline of the local currency, reaching an all-time low of Rs300.22 against the US dollar.
The cumulative devaluation of nearly 4%, or Rs11.73, in the first 11 days of the caretaker government underlines the accuracy of pre-interim government predictions of further currency depreciation. In the past year, the currency has devalued by over 27%, equivalent to almost Rs 82, compared to the rate on August 24, 2022, at Rs 218.38 per US dollar.
The hope that the currency might stabilise within the range of Rs295 to Rs305 per US dollar is contingent on addressing the growing demand for the dollar in the local economy. Traders are seeking to clear pending import payments, international airlines are receiving settlements for their services in Pakistan, and multinational companies are remitting profits to their overseas headquarters.
Speculation is also a factor in the rupee’s devaluation, with banks engaging in speculative trading activities. Additionally, the rise of illicit hawala-hundi operators in the country and abroad is a significant cause of the rupee’s continuous depreciation.
The currency depreciation has far-reaching consequences. Pakistan’s status as a major importer of petroleum oil and food products is of concern. The unrelenting depreciation threatens to maintain high inflation rates and hinder economic growth. Pakistan must arrange substantial finances to address the current account deficit, repay maturing foreign debt, and cover interest payments on foreign debt.

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