Pakistan: Crackdown against illegal currency market eliminates black-market rate

The Institute of International Finance expects the rupee to weaken by over six per cent against the US dollar and the UAE dirham in 2024-25


Waheed Abbas

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Image used for illustrative purpose. Photo: File
Image used for illustrative purpose. Photo: File

Published: Thu 25 Jan 2024, 4:17 PM

The crackdown launched by the Pakistani military against illegal currency players to control the smuggling of the dollar has almost removed the black market rates, a US think-tank said.

“A strong military crackdown on illegal currency markets that began in September has virtually eliminated the black-market rate, supporting capital inflows and remittances. Lastly, the passage of the state-owned enterprises (SOE) law should enable Pakistan to privatise troubled SOE’s, reducing fiscal expenditure while also providing another avenue for financing,” Garbis Iradian, chief economist for Mena and Central Asia, Institute of International Finance (IIF), said in a note.

The South Asian currency witnessed massive volatility and weakness due to high demand for the dollar, smuggling of foreign currencies and political and economic uncertainty. The gap between the official and open market of the Pakistani rupee widened drastically due to the dollar smuggling last year. After the crackdown, the gap began to narrow down as dollar supply increased, narrowing down the official and open market rates.

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In 2023, the rupee fell from Dh226 at the start of the year to 282 at the end of December. It touched an all-time low of 307.5 in the first week of September, prompting authorities to launch a crackdown against currency smuggling.

Rupee set to weaken in 2024-25

IIF expects the rupee to weaken by over six per cent against the US dollar and the UAE dirham in 2024-25 due to high demand for the greenback.

According to the IIF's latest study, the South Asian currency will weaken to nearly 298 against the dollar (81.2 against dirham) from Thursday’s price of 279.6 against the American currency.

It expects the rupee to trade on average 290.7 against the dollar in 2023-24.

Iradian forecast Pakisan’s GDP growth at 2.2 per cent in the 2024 fiscal year, supported by private consumption and net exports.

“Such modest growth is weighed down by a lack of forex and high-interest rates that continue to affect the manufacturing and service sectors. Inflation will gradually decline to an average of 24 per cent in the current fiscal year and 14 per cent in the 2024-25 fiscal year. While food and fuel inflation will come down this year, we expect a depreciating rupee, rising energy prices, and increased taxes to feed into inflation, partly offsetting gains of falling commodity prices,” he said.

Bilateral financing and deposits

IIF chief economist expects the State Bank of Pakistan (SBP) to leave interest rates at this level for the remainder of the fiscal year.

“Year-to-date, high-frequency data has shown a continued decline in imports, in large part due to poor domestic demand. However, we expect this trend to reverse in the second half of 2024, driven by the elimination of import restrictions, depreciation of the rupee, and a pick-up in domestic demand. Recovering imports, lacklustre remittances, and high-interest payments will outweigh the solid recovery in exports of goods and we see the current account deficit increasing to -1.0 per cent of GDP,” it said.

It expects IMF and multilateral programme loans, bilateral financing, and deposits from Saudi Arabia, the UAE, and China will help finance the deficit, leading to reserves increasing by $4.5 billion to $10.1 billion by the end of June of this year, equivalent to 1.7 months of import coverage.


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