THERE has been a consistent, significant outflow of dollars from Pakistan to Afghanistan ever since the US froze the war-ravaged country’s reserves following the Taliban takeover in summer last year. Until then, Afghanistan had been a notable exporter of dollars — poured into its economy by the US — to Pakistan for years. Thus, the reversal of Afghan fortunes has had a considerable impact on Pakistan’s weakening external sector, as stressed by the Exchange Companies Association of Pakistan on Monday.

The association has said that the large-scale, illegal outflow of the greenback to Afghanistan, along with other much-discussed factors such as the trade and current account deficits and diminishing multilateral and bilateral inflows, has eroded Pakistan’s foreign currency reserves. The unhindered flow of the American currency to Afghanistan has created a crisis for Pakistan, the association officials said at a presser.

According to them, in addition to US sanctions on the Taliban regime, Kabul’s directions to its citizens to convert their large Pakistani rupee holdings into dollars or other foreign currencies had ramped up the greenback’s flow towards Afghanistan in recent months. According to Ecap, Afghans were no longer allowed to keep more than half a million worth of Pakistani currency, and any person found in violation of this order would be tried under the anti-money laundering laws.

That the State Bank restriction limiting the annual personal foreign exchange allowance to $6,000 for travellers hasn’t succeeded in arresting this illegal flow of foreign exchange underlines the corruption and weaknesses that define Customs control at the Pak-Afghan border. Surprisingly, no administrative measure adopted over the last one year to stop dollar smuggling across the country’s western frontier has produced the desired results, barring the occasional arrest for attempting to take out the hard currency in large amounts.

The illegitimate dollar outflow is one of the many factors that have brought Pakistan’s exchange rate under immense pressure in recent months and contributed to market dislocation, resulting in different exchange rates in the interbank and open markets. There are no two opinions on the need to plug the illegitimate dollar flows from the country to Afghanistan.

However, the dollar outflow is not restricted to Afghanistan, as shown by the arrest of three Gulf-bound passengers and the recovery of $60,000 from them. Pakistan needs to strengthen its controls at its land borders and ports to ward off the dollar’s flight from the country, be it in any direction.

Published in Dawn, December 28th, 2022