THE new curbs announced by the central bank to plug the dollar outflow from Pakistan into Afghanistan may address to some extent what is seen as a key reason for the mounting pressure on Pakistan’s exchange rate as well as slow down what we know as ‘dollarisation’ of the economy. The restrictions — such as compulsory biometric verification of buyers purchasing $500 or above, limits on the foreign exchange allowance for people travelling to Afghanistan, and prohibition of the sale of foreign currency amounting to $10,000 or more against cash — may also boost dollar liquidity in the market somewhat and help document foreign exchange trade. But the question is: would such curbs provide long-term support to the rupee, which has depreciated by 12.3pc since mid-May and 7.6pc from the start of the ongoing fiscal to an all-time low of Rs170.96 to the dollar?

The rupee decline is but a symptom of the chronic disease ailing the economy or, in other words, the home currency’s response to the burgeoning trade deficit that has doubled during the July-September period from a year ago and spiking price inflation. The policymakers appear to have been blindsided by a rapid growth in domestic demand and expensive imports fuelled by their relentless pursuit of a higher GDP growth through expansive fiscal and monetary policies ahead of the 2023 election. Such factors as the outflow of dollars to Afghanistan, the not-so-cosy relationships with the IMF and Washington, and higher US treasury rates have only exacerbated an already problematic situation. It is good to see the fiscal and monetary authorities finally take some action in an attempt to control the re-emergence of vulnerabilities in the economy. But such ad hoc steps cannot be a substitute for sound economic policies and deep structural reforms. As long as these simple home truths continue to elude our policymakers, all attempts to push higher economic growth without increasing domestic productivity and boosting exports will lead us back to where we stand today ie at the brink of a crisis.

Published in Dawn, October 8th, 2021