THE purported government decision to restrict the purchase of foreign currency by individuals to $5,000 per day and $50,000 per calendar year to reduce dollar outflow, discourage speculative foreign exchange trade and ease pressure on the exchange rate has come a little late in the day. Yet it must help subdue speculative pressures on the exchange rate that have caused immense volatility in the market, and bridge the wide gap between the interbank and kerb markets going forward. The decision was reportedly made during a meeting of Finance Minister Ishaq Dar with the State Bank governor Jamil Ahmad. They also decided to use the FIA to take action against foreign currency dealers involved in speculative currency trading and stop the ‘smuggling’ of foreign currency through Peshawar.

Pakistan is currently going through one of its worst currency crises in decades. Even the resumption of the IMF support package in August has failed to stabilise the nation’s external account, and the odds of the crisis continuing for the next several months have significantly increased following the devastating floods that are estimated by international agencies to have caused damage of more than $32bn to the economy. GDP growth is projected to fall below 2pc this fiscal year, and it is feared that the current account deficit will widen beyond the budgeted target of 2.4pc on increased food and cotton imports and decreased exports. International credit rating agencies have also cut Pakistan’s sovereign rating recently because of its increasing external sector vulnerabilities. Thus, the possibility of the currency crisis involving further depreciation of the exchange rate and extensive depletion of foreign exchange reserves in the near future cannot be ruled out as the promised multilateral and bilateral dollars are slow to arrive. Mr Dar has repeatedly asserted that the real inflation-adjusted value of the rupee is less than 200 to a dollar, and many, including the State Bank governor, seem to agree with him. However, the restrictions proposed on individuals’ purchases of the dollar are perhaps his first tangible action to stabilise the exchange rate. But this isn’t enough to strengthen the exchange rate in line with its fair value. With the State Bank foreign exchange reserves down to $8.9bn, both the government and the central bank will have to implement more stringent controls to stop legal and illegal dollar outflows considering the precarious liquidity situation. Once the reserves start improving, these restrictions can be removed in a phased manner.

Published in Dawn, November 9th, 2022