Even after the State Bank of Pakistan’s (SBP) attempts to raise the interest rate in a bid to control the devaluation of the rupee, the dollar continues to touch all-time highs here at home. Friday saw yet another record broken as the dollar reached the value of Rs181.3 in the open market. The Federal Investigation Agency (FIA) has identified the illegal outflow of currency as the major reason. Raids are being conducted, investigations carried out and foreign currency seized. With 158 people arrested and Rs300 million of foreign and local currency confiscated, it seems like the government is not in a tolerant mood on this issue. However, none of this seems to be working.
While the FIA’s actions against the black market are commendable, it is clear that much more is at play here—simple illegal outflow does not even begin to cover the extent of the problem. On its part, the SBP has done what it can. Interest rates have been hiked twice in recent months, and it is hoped that this will lead to an increase in foreign investment and reduction in spending on imports.
However, the government could be doing much more as well. Supply-side policies have not been a major focus for the government. There is no real attempt to make Pakistani products more competitive on the international stage to allow for an offset to the high imports. Curtailing the import of luxury items will not really help because our dependence on imports for oil and staple food items—even though we are an agricultural economy—means that our balance will remain skewed unless we look to improve on exports.
The attempts to reduce imports by simply increasing duties is a stop-gap measure, not the policy solution the government treats it as. There have been no realistic attempts to curtail local inflation which would help in the attempts to stabilise the Rupee. The government’s focus instead has been on relief efforts, which again, is nothing more than a temporary measure.
