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Pakistan’s free-floating exchange rate is benefiting slightly from the decision to remove the dollar ceiling. The dollar exchange rate on the informal “gray market” is now lower than on the free market. This indicates that the dollar has decreased through informal channels, such as the Kabul market. The interbank rate also increased by 98 paisa.
While the broader issue remains as Kabul depends on this dollar smuggling, this upgrade is a good step towards strengthening the rupee. Ideally, this change should increase domestic remittances through banking channels and, if coupled with IMF tranche transfers, could increase remittances. The fact that remittances were just $2 billion in December 2022, a 19 percent year-on-year decline, suggests the need for immediate relief. The exchange rate determined in the market was also one of the main terms of the IMF discussions along with the electricity tariffs, so it is hoped that it will help in this regard as well.
Despite the warnings, the situation worsened due to unconventional economic policies that reduced workers’ remittances, encouraged an illegal exchange and remittance market, and fueled inflation. Therefore, if this development is positive at the moment, it should also be sustainable. Ideally, the move should be to reduce import dependency, but this is a long and difficult process. Short-term measures should be to avoid immediate default by focusing on IMF program requirements and then focusing on medium- and long-term solutions. The way forward needs increased exports and possibly business process outsourcing. It should be remembered that devaluation affects almost all sectors of the economy, as they are more dependent on imports and their profit margins take a hit.
But the rupee is predicted to remain volatile with the balance of payments crisis. The difficult part is to increase the value of the rupee and hopefully the situation will be eased by fund payments and this can be seen as an incentive to invest in the long process of upgrading and modernizing the orthodox economy of Pakistan.
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