The rumoured government decision to cap individual foreign currency purchases at $5,000 per day and $50,000 per year has been made somewhat belatedly in an effort to stem the flow of dollars abroad, deter speculative foreign exchange trading, and relieve pressure on the exchange rate. However, it must work to reduce the enormous market volatility brought on by speculative pressures on the currency rate and eventually close the large gap between the interbank and kerb markets. Ishaq Dar, the finance minister, and Jamil Ahmad, the governor of the State Bank, are said to have discussed the decision at their meeting.
They also determined to stop the “smuggling” of foreign cash through Peshawar by using the FIA to take legal action against foreign currency dealers engaged in speculative currency trading.
The present currency crisis in Pakistan is the country’s worst in decades. Even the IMF support package’s restart in August was unable to stabilise the country’s external balance, and the likelihood that the crisis will persist for several months has significantly increased in the wake of the devastating floods, which are estimated by international agencies to have cost the economy more than $32 billion in losses. Due to higher imports of food and cotton and lower exports, GDP growth is expected to be below 2 percent this fiscal year, and it is believed that this would result in a current account deficit that is higher than the planned aim of 2.4 percent. Due to Pakistan’s growing external sector vulnerabilities, international credit rating agencies have reduced Pakistan’s sovereign rating.
Therefore, given the sluggish arrival of the promised multilateral and bilateral dollars, it is not impossible that a currency crisis with further exchange rate depreciation and significant depletion of foreign exchange reserves may occur in the near future. Mr. Dar has maintained time and time again that the real value of the rupee, after accounting for inflation, is less than 200 to the dollar, and many others, including the governor of the State Bank, appear to concur. However, his suggested limitations on people buying dollars may be his first concrete step toward stabilising the exchange rate. However, this is insufficient to raise the exchange rate to its fair value.
Given the dangerous liquidity situation and the State Bank’s declining foreign exchange reserves, which have dropped to $8.9 billion, the government and the central bank will need to enact stricter measures to halt both legal and illegitimate dollar outflows. These limitations can be phased out once the reserves start to improve.
