The rupee saw wild swings throughout the year, hitting its record low against the US dollar multiple times, only to end its worst 12-month period since the 2008 global financial meltdown with a massive depreciation of 22%.

Since the turn of the century, the rupee has depreciated in 18 out of the 22 years, with 2022 being the second-worst after 2008.

(Graph below shows the rupee’s inter-bank performance against the US dollar since 2001).

The rupee closed at 226.43 against the US dollar on Friday (December 30, 2022), after starting the year at 176.51. This was the story in the inter-bank market. The open market and the so-called ‘black’ market have an even more sorry story to tell.

What happened to the currency?

Three finance ministers and an equal number of State Bank of Pakistan (SBP) governors later, one could hope the rupee will show some stability. However, the currency is likely to remain under pressure in 2023 as well. Simple reason — Pakistan sees more outflow of dollars than it sees inflow. The current account deficit may have reduced, but it has come at the cost of massive import curbs, and administrative measures, which the government insists do not amount to market intervention.

At the same time, a delay in the International Monetary Fund (IMF) programme, and an inability to secure inflows from ‘friendly countries’ – inflows that are largely band-aids, and not economic remedies – will keep the currency market under pressure.

Pakistan began 2022 with Pakistan Tehreek-e-Insaf (PTI) at the helm of affairs. Senator Shaukat Tarin was at the top seat of the finance ministry, carrying forward an expansionary economic policy.

During January, the rupee remained largely stable and traded within the 176 bracket. This is when the SBP’s foreign exchange reserves were at a high level.

(See graphs below for rupee’s closing levels in the inter-bank market, and SBP-held foreign exchange reserves during the year)

Notice that the fall in reserves also coincides with the pace at which rupee depreciates.

On February 24, 2022, Russia invaded Ukraine in a major escalation of the conflict that began in 2014. It had a significant impact globally, the effects of which were felt in Pakistan as well.

“The development resulted in a massive increase in oil and gas prices, which dented Pakistan’s [a net importer of energy commodities] economic indicators including the current account deficit, creating pressure on the rupee,” Abdullah Umer, a market expert, told Business Recorder earlier this week.

Moreover, the then-incumbent government of PTI, in its effort to counter the opposition parties that were preparing a no-confidence motion to push Imran Khan out of the Prime Minister’s Office, announced a nearly $1.5 billion fuel and electricity subsidy package.

The relief package, which took markets by surprise given global oil prices and Pakistan’s economic conditions, was strongly opposed by multilateral lenders including the IMF and World Bank and put the crucial IMF programme off-track.

“The PTI’s relief package led to an increase in the current account deficit, creating fiscal pressures, which affected the rupee as well,” said Arsalan Siddiqui, Head of Research at Optimus Research, told Business Recorder.

The delay in the IMF programme and rise in political noise continued to take its toll on the local currency throughout the month of March. However, April began with a major political development, after Pakistan’s lawmakers voted to remove Imran Khan from office in a vote of no confidence.

This pushed the rupee well above the 180 level amid political upheaval tagged with economic uncertainty.

The arrival of Shehbaz Sharif-led coalition government of the Pakistan Democratic Movement (PDM) took charge in Islamabad.

Pakistan Muslim League-Nawaz’s (PML-N), Miftah Ismail took charge of the country’s economic affairs, prioritising the IMF programme as he saw it key to saving the economy.

However, rising political volatility and delays over the resumption of the IMF programme, as the Miftah-led Pakistani delegation remained in talks with the international lender, alongside a rising import bill, kept the rupee under pressure against the US dollar.

In July, the Pakistani rupee witnessed its worst month in over 50 years after depreciating 14.5%.

The rupee had started July off at 204.85 in the inter-bank market. However, despite fewer trading sessions due to Eid holidays, the currency received a hammering to eventually close at 239.37 on July 29.

However, the currency found some respite in August as Pakistan’s talks with the IMF made significant progress, which was reflected in the appreciation of the local currency, which moved from a record low of 239.94 against the US dollar recorded on July 28 to 213.9 on August 16.

On August 29, Miftah announced that the IMF executive board approved the revival of Pakistan’s Extended Fund Facility (EFF) programme after which the country received the 7th and 8th tranche of $1.17 billion.

However, domestic political squabbles continued as the market remained engulfed in reports suggesting veteran politician Ishaq Dar’s return to Pakistan and declining foreign exchange reserves kept the markets under pressure. The rupee was back on the receiving end, hitting 239.71 on September 22.

On September 26, after a self-exile of nearly five years and several speculations, the senior PML-N leader, also dubbed as a ‘finance wizard’, Ishaq Dar returned to Pakistan, and took oath as Pakistan’s new finance minister for the fourth time.

Dar, widely seen as an advocate of a strong rupee, was adamant that the rupee’s “real value” was below the 200 level against the US dollar. At the time, Dar cited Real Effective Exchange Rate (REER) as a reason.

The ‘Dar factor’, largely the result of pure sentiment, saw the rupee begin an appreciation run and in a matter of days touch the 217 level by mid-October.

“This appreciation was led by expectations over Dar’s past history,” said Siddiqui.

“However, nobody predicted that the IMF programme would be delayed again as government measures were insufficient to meet the international lender’s demands,” he said.

This has been the case to date as well.

Now, there is an emergence of illegal/grey markets, which has put policymakers in a new kind of bother.

The rise in Hawala and Hundi practices amid SBP’s stringent measures to curb the outflow of precious foreign exchange saw a rise of the grey market.

Currency dealers and market experts are now expressing concern on the smuggling of US dollars to neighbouring countries, which would only worsen the situation in Pakistan.

“Pre-Covid, the quantum of Hawala/Hundi transactions was roughly around $6-8 billion,” shared Abdullah Umer. “However, during the Covid-19 pandemic, amid stringent travel restrictions, people moved towards official channels to send their remittances, which was reflected in a significant increase in the workers’ remittances to Pakistan in 2021.”

“But the trend started to plateau in 2022 as travel restrictions were lifted, which saw a resurgence of Hawala/Hundi,” he said.

This is not just the case in Pakistan. A similar trend is witnessed in some other countries as well.

However, compared to others, the situation in Pakistan is worse.

What now?

Currently, there are three simultaneous currency markets — the inter-bank market, where hardly any trades are being reported, the open market, where there is a massive shortage of foreign currency (especially the US dollar), and the so-called ‘black market’, where trades are occurring, but at rates around Rs255 and above.

This situation sums up Pakistan’s economic woes. Official data and rates mean very little in a country that has as big an informal market as it does a formal one — where the formal sector ends up contributing much more in taxes because it is easier for the government to tap those shoulders repeatedly. Except, this year, the tap on the shoulder became a gun to the head.

IMF programme is key

Going forward, market experts say the resumption of the IMF programme is key for the return of economic stability.

“The sooner we enter the IMF programme, the better as the continuous delay gives a negative signal to the market,” said Siddiqui, adding that the revival of the programme would also ramp up forex reserves, which will bring some respite to the currency.