WHEN it comes to learning from past failures, Pakistan’s policymakers have shown a remarkable tendency to do quite the opposite. The latest attempt to allegedly push down the exchange rate to an arbitrary target of Rs250 per dollar is yet another example of how short-term gains can take precedence over long-term economic stability in the country. Even pushback from the market has failed to deter policymakers from pursuing the artificial benchmark — a ‘policy’ that has previously led to rapid and sharp devaluations, pushed the country to the brink of default and undermined export competitiveness. Grey trade has also been flourishing, starving the legitimate market of liquidity ever since the authorities put pressure on the market players to meet their whimsical target. The crunch is forcing people to purchase dollars for their legitimate needs, such as travel and education, at a very high premium from the grey market.

The exchange rate is under pressure on multiple fronts — ranging from a seasonal surge in demand by individuals to an uptick in imports. The State Bank’s directive requiring banks to meet import payments through their own exports and remittances inflows is further fuelling the dollar’s appreciation. Facing a mismatch between dollar inflows and outflows, banks are now selling dollars to importers at a premium above the interbank rate, or refusing to entertain them at all. Exchange companies report a spike in demand for illegal transfers out of Pakistan, driven in part by businesses relocating to Dubai. The mounting pressure on the exchange rate in recent months has also prompted many to hedge by shifting their savings to dollars. The exchange companies insist that there is no dollar crunch. The emergence of the grey market, they argue, has been fuelled by growing demand and speculation. The widening gap between market sentiments and official expectations, say market analysts, shows that the target rate is unrealistic. There is a possibility that the authorities may improve the rupee-dollar parity through administrative measures. For how long, though? The country’s fragile economy does not support a stronger rupee. It will only fuel uncertainty, affect exports and discourage remittances. Sooner or later, market dynamics would have to be allowed to determine the real exchange rate through big depreciations. Otherwise, we will risk another balance-of-payments crisis — or even a potential default.

Published in Dawn, August 8th, 2025