THE Pakistani rupee is expected to end a turbulent year on a depressing note as one of the world’s worst-performing currencies. The rupee has declined by almost 12pc since the start of the year and more than 17pc after having bottomed out to 152.50 to a dollar in mid-May as the country hit balance-of-payment troubles that always follow its ‘growth spurts’. The year 2021 began with the government boasting about a quicker economic recovery in the midst of the pandemic, and saw the rulers aiming for rapid economic growth to pacify a public hit by soaring inflation, shrinking incomes and rising unemployment. However, by the end of the year they had to once again turn to the IMF to put the economy into stabilisation mode. The quick regime change in Kabul last summer also intensified the pressure on the external sector due to the increased outflow of dollars to war-torn Afghanistan as the world turned away from the new Taliban rulers.

Although the State Bank has taken numerous measures to stabilise the rupee and the FIA is continuously cracking down on hoarders and smugglers to restrict the outflow of the American currency and ease its demand, the flight of the dollar continues. A senior FIA official admitted as much to this paper recently. While the authorities’ actions are necessary to stop the illegal cross-border currency transfer, especially given Pakistan’s troubles with the FATF, the task force with the mandate to combat money laundering and terrorism financing, the pressure on the home currency cannot be eased and the dollar’s flight cannot be checked without improving the country’s economic fundamentals.

The interbank market data for the last one week shows that the rapid decline in the value of the rupee has eased and some semblance of stability in the exchange rate is returning. But for how long? With the current account deficit growing to more than $7bn or 5.3pc of GDP from July to November, against the State Bank’s revised projection of 4pc for the entire year, and the monthly headline inflation numbers hovering in double digits, it is naïve to expect the rupee to strengthen in the immediate term. This is so despite the recent statements of Finance Minister Shaukat Tarin that the home currency is overvalued by around 8pc or more. The markets have their own way of reacting to economic developments. Even though the rupee gained some lost ground after Riyadh announced a $4.2bn assistance package for Islamabad towards the end of October, the sentiment didn’t last long since the economic fundamentals were weak. Many expect the market to stabilise further once the IMF programme resumes next month and the dollars start flowing in. That still will be a short-term respite unless followed by structural reforms to put the country on a sustainable export-led growth path and lower price inflation.

Published in Dawn, December 28th, 2021