The Pakistani rupee has started recovering against the US dollar over the news of breakthrough with the International Monetary Fund and the announcement of the Afghan government regarding the smuggling of dollars to Kabul specially from Pakistan.
According to forex dealers, the main reason behind [rupee’s appreciation] is the staff-level agreement between Pakistan and IMF drawing closer, with sources claiming that the talks went successful.
While the wider issue remains, as Kabul is dependent on this dollar smuggling, this update is a good step toward strengthening the rupee. Ideally, this change should increase inward remittances through banking channels, and if it is coupled with the IMF tranche release, could increase inflows.
The fact that remittances for the month of December 2022 were a mere $2 billion, reflecting a 19 percent decline over a year, indicates the need for immediate relief.
Despite warnings, the situation deteriorated to this extent due to an unorthodox economic policy that put worker remittances in decline, encouraged the illegal market for exchange and transfer, and fostered inflation. Therefore, if this development is positive at the moment, it should also be sustainable. Ideally, the move should be toward reducing import dependency but that is a long and difficult process.
The short-term measure should be to avoid immediate default by focusing on the IMF programme requirements and then focusing on medium and long-term solutions. The way forward needs an increase in exports and perhaps business process outsourcing. It must be remembered that devaluation affects almost all sectors of the economy as they are mostly import dependent and their profit margin is suffering a blow.
However, it is predicted that the rupee will remain unstable with the balance of payments crisis. The hard part is to increase the value of the rupee and hopefully, the situation is mitigated with fund disbursements and can be seen as an incentive to invest in the long process of upgrading and modernizing Pakistan’s orthodox economy.
