IN recent years, Pakistan’s foreign exchange market has presented a strange paradox: the rupee appears ‘stable’, official reserves have grown, and the informal/black market has receded.
But behind this illusion of calm lies a hollow economy, ie, exports remain stagnant, competitiveness is deteriorating, and industrial confidence is eroding. Is this the success of prudent macroeconomic stewardship or the triumph of administrative sleight of hand?
Despite the painful experience of at least six major currency crises, the state continues to obsessively fix the nominal rate. From 2023 to 2025, the authorities indeed managed to stabilise the currency and rebuild reserves. But at what cost?
The apparent stability has been engineered not through market trust or export dynamism, but through an elaborate system of administrative controls and currency rationing.
Today, Pakistan operates two distinct foreign exchange markets — one official, the other informal. This duality is a product of a long-standing desire to control the rupee.
The interbank market is tightly supervised by the State Bank of Pakistan (SBP), which apparently takes an upfront share of all foreign currency inflows from exports and remittances, and dictates to banks how much they may allocate towards import payments.
Letters of credit (LCs), particularly for so-called non-essential goods, are heavily restricted. The result is a deliberate throttling of demand, carefully orchestrated to sustain an artificial exchange rate.
The illusion is sustained by rising remittances, which have surged over the past two years. This rise is less a triumph of policy and more a symptom of a broken domestic economy.
A growing exodus of skilled and unskilled Pakistanis, unable to find opportunities at home, are sending more money back because inflation has increased the financial burden for families at home.
And in many cases, families that had once migrated have returned to Pakistan due to rising global living costs, prompting the bread earner to support them locally. These remittances have become the lifeline of our foreign exchange position, but are rooted in economic despair, not development.
Despite at least six major currency crises, the state continues to obsessively fix the nominal rate.
On the demand side, dollar outflows have contracted. The relocation of kosher capital (to escape an encumbering tax environment and the excessive and unpredictable cost of doing business) and capital flight driven by tax evasion, corruption and drug proceeds, has slowed due to tighter scrutiny in offshore jurisdictions.
Under-invoiced imports and smuggling, previously encouraged by high duties and GST, have receded in the face of weak consumer demand and a stagnating economy.
Foreign travel for education, pilgrimage and leisure has dipped due to the rupee’s depreciation and inflationary pressures, leading to an uptick in domestic tourism and greater reliance on private local universities. These declines, however, reflect contraction, not correction.
Increases in duties have often been employed as stopgap measures to suppress import demand and relieve pressure on the exchange rate. By raising tariffs, in particular on consumer and ‘non-essential’ goods, the government aims to reduce the outflow of foreign exchange, artificially easing the trade deficit.
This tactic, however, functions more as a tool of exchange rate defence than sound trade policy. While it may temporarily slow imports and delay the rupee’s depreciation, it raises input costs for domestic producers, discourages export competitiveness, and entrenches inefficiencies, ultimately undermining the very stability it seeks to preserve.
Meanwhile, enforcement has been used to fill the vacuum left by policy. The SBP has imposed hard caps on currency dealers, while the FIA conducts raids on the informal market — a theatre of suppression that conveniently lines the pockets of some enforcement personnel. It is a fragile peace, maintained through force and friction, not reform.
To justify the controls, the SBP continues to tout its Real Effective Exchange Rate as evidence of an undervalued rupee. Analysts quote it with reverence, but it is a meaningless number.
When trade is restricted, imports are rationed, and price signals are distorted, REER becomes little more than a statistical hallucination. Open up the market and the real rate will quickly emerge.
What we have, then, is not stability but suspension. The rupee’s apparent strength is not grounded in productivity, efficiency or a booming export sector. It is built on repression, rationing through administrative controls and borrowed credibility.
Exporters face rising input costs, shipment delays and disruptions in raw material supply chains, while international buyers grow wary of Pakistan’s reliability as a trading partner. The country is not becoming more competitive; it is simply freezing in place.
The question before us is not whether the rupee can hold its position. It is whether holding it in this manner serves the economic good. The longer we pretend that this engineered calm is sustainable, the more we strangle our industry, discourage investment and defer the inevitable reckoning. This is not macroeconomic management; it is macroeconomic theatre.
If Pakistan genuinely wants lasting stability, it must abandon its fixation with optics and return to the fundamentals. The foreign exchange market must be liberalised. Import restrictions through LC associated rationing must be replaced with prudent current account oversight.
Exporters must be supported with the real enablers of competitiveness, ie, energy, inputs, a rationalised import tariff configuration, logistics and regulatory certainty. Above all, the SBP must operate with transparency, not through coercion.
Ultimately, a lasting way to stabilise the exchange rate in Pakistan lies in credible fiscal correction. By curbing unnecessary spending, and improving a transparent and equitable tax structure with fair and consistent processes, the government can lower its reliance on external borrowing and money printing — two key drivers of currency pressure.
A sound fiscal position builds investor confidence, eases inflationary expectations and reduces the demand for foreign exchange, creating a more durable foundation for exchange rate stability than administrative controls or temporary inflows.
Until then, the rupee is simply a house of sand held together by borrowed time, borrowed dollars, and borrowed ideas. And sand, as we know, always slips through the cracks.
Nadeem Ul Haque is former deputy chairman, Planning Commission. Shahid Kardar is former governor, State Bank of Pakistan.
X: @nadeemhaque
Published in Dawn, July 4th, 2025
