Real Economy
Real Economy: Pakistan’s economic debate still uses old ideas about the exchange rate. Whenever the rupee loses value, many people call it a “devaluation.” They expect the government to stop it. This thinking belongs to the past. Today, most countries allow market forces to determine their exchange rates. When an economy faces serious problems, its currency adjusts naturally. This adjustment helps prevent a bigger economic crisis.
Exchange Rate Basics
The exchange rate is not a government decision. It is the price of one country’s currency compared with another. Many factors affect this price. These include inflation, interest rates, productivity, government spending, trade balances, foreign investment, foreign exchange reserves, and business confidence. The rupee weakens when Pakistan’s economic conditions become weak. It does not weaken because policymakers choose to weaken it.
Exchange Rate Policies
Central banks use different exchange rate systems. Some fix the exchange rate. Others allow the currency to float freely. Some manage it within certain limits. Every system has its own rules. However, no system can keep the exchange rate stable if the economy remains weak. Pakistan has changed its exchange rate policy many times. At times, it controlled the rupee tightly. At other times, it allowed gradual depreciation. It also adjusted the exchange rate under IMF programmes. These actions solved short-term problems but failed to provide a long-term strategy.
Export Challenges
Many people believe that a weaker rupee increases exports. This belief is misleading. Pakistan’s exporters face many other challenges. They pay high electricity and energy costs. They also face heavy taxes, changing government policies, complex regulations, poor transport systems, and slow customs procedures. These problems hurt exports more than changes in the exchange rate. High tariffs and import restrictions also protect local industries from competition. At the same time, exporters pay more for imported raw materials. This makes it harder for them to compete in global markets.
Economic Stability
The exchange rate only reflects the economy’s condition. Strong economic policies create a stable exchange rate. The government must control spending. It must reduce inflation. It should maintain healthy external accounts. It should also encourage competition and build public confidence. Large budget deficits and heavy borrowing increase inflation. They also reduce confidence. Keeping the rupee artificially strong only delays necessary reforms. It also makes future problems more severe.
Understanding REER
Economists use the Real Effective Exchange Rate (REER) to study the currency. REER compares Pakistan’s prices with those of its trading partners after adjusting for inflation. It helps economists judge whether the rupee looks overvalued or undervalued. However, REER cannot identify the exact value of the rupee. It also becomes less useful when the government imposes trade barriers, import controls, or other restrictions. In such cases, these policies affect prices more than the exchange rate.
Temporary Measures
Governments can influence the exchange rate for a short time. They use tariffs, import restrictions, exchange controls, or multiple exchange rates. These measures may reduce pressure temporarily. However, they do not improve competitiveness. Instead, they create shortages. They also increase the gap between official and market exchange rates. As a result, the official rate may look stable even when economic problems continue to grow.
State Bank’s Role
The State Bank of Pakistan can reduce sudden movements in the exchange rate. It can also maintain orderly market conditions. However, it cannot protect the rupee forever. Weak fiscal, monetary, and structural policies eventually weaken the currency. In the end, market forces determine the exchange rate.
Recurring Crisis Cycle
Pakistan’s economic history shows the same pattern again and again. The country keeps an overvalued rupee. Foreign exchange reserves then fall. The government imposes import restrictions. It seeks IMF support. The rupee depreciates sharply. Temporary stability follows. Later, another crisis appears. Policymakers often delay action. They avoid gradual adjustment. As a result, the country faces sudden currency crises and large depreciations.
Current Economic Situation
Pakistan’s current situation is better than in previous crises. The current account remains close to balance. Foreign exchange reserves have improved. The gap between official and unofficial exchange rates has almost disappeared. Importers and exporters can also buy foreign currency more easily. However, this stability may not last. Strong remittances, external borrowing, debt rollovers, and weak import demand have supported the rupee. High inflation has also reduced domestic demand. In addition, the State Bank has directed money changers to send more remittances through formal banking channels. Despite these improvements, investment remains low. Income per person also grows slowly.
Needed Reforms
Pakistan must strengthen its economic fundamentals to achieve lasting exchange rate stability. The government should improve fiscal discipline. It should control inflation. It must reform state-owned enterprises. It should reduce trade barriers. It should improve energy pricing. It should raise productivity. It should modernise transport and logistics. It must also create stable and predictable business policies. These reforms will strengthen the economy and support a stable rupee.
The Real Problem
The exchange rate is not the real problem. It only shows the economy’s health. Breaking a thermometer cannot cure a fever. Likewise, controlling the exchange rate cannot fix Pakistan’s economic weaknesses. The rupee will remain stable only when the economy becomes stronger, more productive, and better managed.
Published in Dawn, 25th July 2026
