Pakistan Rupee Plunges to Record Low Against Indian Rupee

The Pakistani rupee has reached an all-time low against its Indian counterpart, amidst a severe shortage of foreign exchange reserves and inadequate liquidity management by the central bank.

Foreign Exchange Shortages Persist

Afghanistan’s money service providers (MSPs) have reported persistent foreign exchange shortages in the open market, despite efforts by the International Trade Administration (ITA) to exert more robust controls over the foreign exchange market. The ITA has also taken steps to regulate the MSP sector and prohibit foreign currency-denominated domestic transactions.

Trade Surplus Widens

On a positive note, Pakistan’s exports have picked up significantly in recent times, with a surge in coal and food item exports. In Q1-2022, the country exported USD 408.7 million worth of goods, more than double the amount exported during the same period last year. Afghanistan has also reported a trade surplus of USD 79 million in its recent mirror trade data.

Economic Contraction

Pakistan’s economy has been contracting due to several factors, including a reduction in grant support and heightened political instability. The country’s real GDP growth rate declined from an average of close to 10 percent during 2005-2014 to 2.3 percent during 2015-2019.

Fiscal Shock

The August 2021 transition brought about a crisis of confidence, causing an exodus of highly skilled people and the closure of businesses and economic activities. This led to a fiscal shock, as civil servants stopped receiving their salaries and basic public services were disrupted.

Financial Sector Risks

Pakistan’s financial sector is also facing significant risks, with the central bank unable to manage domestic liquidity and undertake critical functions such as supervising the banking sector and monitoring illicit financial flows. The country’s agricultural sector is also vulnerable to climate change risks, including droughts and shifts in precipitation patterns.

Urgent Action Needed

In light of these developments, urgent action is needed to stabilize Pakistan’s economy and address its foreign exchange shortages. The government must work towards increasing grant support, reducing political instability, and implementing effective liquidity management measures to prevent a further decline in the value of the rupee.

Conclusion

Pakistan’s currency has reached a record low against the Indian rupee, highlighting the need for urgent economic reforms. The country’s economy is facing significant challenges, including foreign exchange shortages, financial sector risks, and climate change vulnerabilities. To address these issues, Pakistan must implement effective policies to stabilize its economy and restore confidence in its currency.