The exchange rate sits at the heart of Pakistan’s economic framework. For a country heavily dependent on foreign exchange to finance growth, imports and debt servicing, a credible and competitive currency regime should be a cornerstone of policy. Yet Pakistan’s experience suggests a recurring preference for short-term stability over long-term sustainability — an approach that has repeatedly undermined export competitiveness rather than strengthening it.
For decades, the exchange rate has been treated less as a market signal and more as a political instrument. Authorities have routinely held the rupee at levels that suit near-term inflation management and optics, ignoring underlying economic fundamentals. When foreign exchange reserves eventually come under strain, the adjustment has arrived suddenly and disorderly, eroding confidence and negating any potential export advantage.
Competitiveness requires credibility, not just depreciation
A competitive exchange rate is undeniably important. It improves export margins, incentivises investment in tradable sectors and signals that producing for global markets is viable. However, competitiveness without credibility is ineffective. Exporters will only invest, expand capacity and seek new markets if they believe relative prices will remain broadly aligned with fundamentals over time.
In Pakistan, that belief has been repeatedly shaken. Each cycle of artificial stability followed by abrupt correction has discouraged long-term planning and reinforced risk aversion among exporters.
History consistently shows that prolonged overvaluation functions as a tax on exports and a subsidy to imports — encouraging consumption and rent-seeking while weakening productive capacity.
The Musharraf-era stability mirage
During much of the 2000s, the rupee was effectively pegged near Rs60 per dollar. This apparent stability was widely portrayed as macroeconomic strength, but it masked widening external imbalances. As capital inflows slowed and reserves depleted, the adjustment was both delayed and severe.
Between 2007 and 2009, the rupee depreciated sharply from around Rs60 to over Rs80 per dollar, necessitating IMF support. Exporters, having operated under an overvalued currency for years, were unable to capitalise on the sudden shift. Instead, they faced higher input costs, disrupted financing and weakened balance sheets — conditions that undermined competitiveness rather than restoring it.
Repeating the cycle: 2013–2019
The same pattern re-emerged between 2013 and 2017. Despite rising current-account deficits and declining reserves, the rupee was held within a narrow band of Rs100–105 per dollar. Exporters repeatedly warned that the currency was misaligned, but policymakers prioritised price stability and political comfort.
When adjustment finally came, it was abrupt. The rupee fell sharply in mid-2017, followed by a more pronounced correction after 2018, reaching around Rs160 per dollar by mid-2019. Rather than enabling a smooth export response, the sudden realignment destabilised inflation expectations and corporate planning, once again eroding confidence.
Market distortions and policy fatigue
The past three years have arguably been the most damaging. Delayed adjustments, administrative controls and multiple exchange-rate regimes pushed pressure into informal markets, distorting price signals and worsening uncertainty.
In early 2023, the rupee suffered one of its steepest single-day declines, losing nearly 10 per cent within hours. Over the year, it depreciated by almost 30 per cent, briefly approaching Rs300 per dollar before settling near Rs285 under renewed controls.
These currency shocks coincided with aggressive stabilisation measures — import compression, punitive interest rates, higher energy costs and increased taxation. Any theoretical export gains from depreciation were overwhelmed by rising input costs, constrained financing and collapsing business confidence.
Why exports fail to respond
These repeated episodes underline a fundamental lesson: delayed correction destroys the very competitiveness it is meant to restore. Export markets cannot be regained overnight, and firms cannot invest amid volatility, high borrowing costs and policy uncertainty.
Artificial stability encourages imports and consumption while discouraging investment in tradable sectors. When the reckoning arrives, it does so as a crisis — too sharp and too destabilising to generate a meaningful export response.
The case for gradual adjustment and policy integration
Successful export-led economies do not rely on dramatic devaluations. Instead, they allow gradual, market-aligned adjustments that prevent prolonged misalignment and limit volatility. Exchange-rate policy works only when embedded within a broader framework that includes competitive energy pricing, predictable taxation, efficient logistics and workforce development.
Vietnam offers a clear example. Its authorities have allowed steady, managed adjustments that avoid chronic overvaluation while providing exporters with price predictability. Bangladesh has followed a similar “crawl” approach rather than crisis-driven devaluations, preserving export competitiveness and market share. Pakistan, by contrast, has repeatedly opted for delay followed by disruption.
Conclusion: moving beyond illusion
Pakistan’s core challenge is not choosing between a “strong” or “weak” rupee. It is the persistent belief that administrative controls can substitute for competitiveness. Until exchange-rate policy is anchored in fundamentals, allowed to adjust gradually and integrated into a credible export strategy, depreciation will remain destabilising — and exports will remain vulnerable to the next crisis.
A credible currency is not one that appears stable, but one that businesses can trust.
