The US dollar has risen constantly against the Pak rupee over the last one and a half year, reaching Rs152 in the inter-bank market recently. This is the highest the greenback has ever reached. Looking back, one finds the rupee has weakened by 41.8 percent or by Rs 44.15 since December 2017.

Speculations are rife that the dollar will further appreciate in days to come and will result in a major increase in inflation. Under the harsh terms of the International Monetary Fund (IMF) deal offered to Pakistan, the country will have to leave currency value determination to the market forces.

It has also been reported that due to speculation, an artificial shortage of dollar has been created and people have started buying and hoarding the currency in expectation of gains over time.

The correction in the value of rupee against the dollar has been caused by the government’s inability to reduce the current account deficit. The recent IMF deal can be termed as the cause for its steep fall over the last two weeks or so. The government feels some foreign exchange companies are the culprit and has announced crackdown against them. They are also to be punished in case their involvement in creating an artificial shortage of dollars in the market is proved.

For many days, the dollar was hardly available in the market. This caused a major problem for people intending to travel abroad. There were instructions by the government to money changers to not sell dollars above an agreed upon rate. The question is: will the government arrest the ascent of the dollar?

Pakistan Forex Association President Malik Bostan Khan claims the allegation against them of hoarding holds no ground because the rate first increased in the interbank and then was passed on to them. "We have met the prime minister and explained the situation to him; currently there is no government plan to close down forex companies."

Khan says they have told the prime minister that their companies bring millions of dollars in the form of remittances every year and are the ones that cater to the foreign currency needs of the people. "The volume of our trade in foreign currency is a small part of that carried out by commercial banks, so how can we create a foreign currency shortage?"

He says it is not possible for them to sell the dollar at a fixed rate if it is less than the inter-bank rate. "Selling at less than this rate does not make economic sense because the banks are more than happy to buy dollars from them at an inter-bank rate," he adds.

Khan urges the government to bring the amount allowed to outbound travellers from the existing USD 10,000 to USD 3,000 which will help avoid capital flight. "Forex companies cannot be doubted for transferring dollars abroad illegally because they make videos of people buying and selling foreign currencies and also keep a record of their antecedents." Cutting down imports, increasing and diversifying value-added exports and going for import substitution are the solutions to the foreign currency crisis in his opinion.

Economist Asad Sayeed is clear that rupee’s weakness against the dollar is essentially because Pakistan earns fewer dollars than it spends. Central to this problem, in his opinion, is the fact that the country’s exports have stagnated over a long period of time and imports have increased at a frenetic pace.

"Apart from necessary imports (such as oil and machinery) since the liberalisation of the economy in the 1990s, protection for local products has reduced through a reduction in import duties. This has not only resulted in imported goods flooding the market but it has also taken away the incentive for import substitution." Pakistan, therefore, imports finished products and raw materials beyond what it should or needs to.

Sayeed believe,s "There is no reason why we should be importing, for example, cooking oil or lentils (both together cost $2.5 billion last year) and there is no reason why certain industries, such as pharmaceuticals or automobiles have not been able to create backward linkages and manufacture their own raw materials or spare parts." There are, thus, structural reasons for Pakistan’s recurring foreign exchange crises.

"In the immediate past, the Pakistan Muslim League- Nawaz (PML N) government had kept the exchange rate over-valued for a long time and that created the foreign exchange crisis that required devaluation," he adds.

Sayeed does not think there are any short term solutions. In the medium to long term, he says, there is a need for an explicit industrial policy and one on import substitution to stabilise and strengthen the external account.

"The most recent fall in rupee’s value is most certainly because of the IMF. Whereas stabilisation required devaluation, the extent to which the rupee was allowed to slide is unwarranted."

Naveed Iftikhar, a former official at the federal ministry of finance, believes the fall in rupee’s value against the dollar was expected for long but the speed at which this has happened has shocked people. "People have a great infatuation with currency value but keeping in view the fundamentals of Pakistan’s economy the situation is not as serious as it is being portrayed.

At some point in time, he says, the support had to be withdrawn and currency rates left to the market forces. "It is just like removing the crutches and making an injured man stand on his feet, though with some difficulty."

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Iftikhar cites the example of China which kept its currency artificially devalued for quite a long period because it wanted to focus on high local productivity and exports. "What happened in Pakistan was that due to the artificial value of rupee against the dollar, imports became cheaper and people preferred to import finished products rather than relying on local products." This harmed the local industry and owners of manufacturing units became importers, closing down their units." He says an imported product that should have cost around Rs100,000 was available here for Rs60,000 because of the overvalued rupee.

Talking about CPEC, he says the import of machinery by companies working here puts pressure on the currency and contributes to trade deficit. "There will be greater impact when these companies will start repatriating their profits in dollars so we will have to be ready for this as well," he adds.

Iftikhar explains that by leaving the exchange rate at market forces also means that the State Bank of Pakistan (SBP) is stopped from taking certain restrictive measures to keep the dollar value in control. "Such measures include stopping businessmen from opening foreign currency accounts, forbidding them from keeping 35 percent export proceeds in dollars which is allowed to them, delaying release of funds in dollars against Letters of Credit (LCs), etc. When these restrictions are removed there is a certain surge in demand of dollars and its value.

Mubashar Bashir, a chartered accountant and a banker, terms judicious tax collection a major tool that can strengthen the local currency. If the tax net is widened and black economy documented, the tax receipts will be manifold the existing figure, he argues. "With locally generated resources at our disposal, the country will need less foreign loans and save forex reserves used for debt servicing."