Pakistan’s Rupee Value Sparks Economic Alarm
ISLAMABAD — Pakistan’s Economic Advisory Council (EAC) sounded the alarm Wednesday over the strengthening rupee, warning that its undermining the country’s export competitiveness. The council urged Prime Minister shehbaz Sharif to intervene, citing mounting pressure on the exchange rate, a concern echoed in central bank data.
The nine-member council, meeting Wednesday, focused on the Real Effective Exchange Rate (REER). This key indicator, measuring the currency’s value against a basket of foreign currencies, hit 104.05 in January 2025. Officials explained this signifies a 4% overvaluation of the rupee, as a REER of 100 indicates fair market value. Any deviation suggests the rupee’s price doesn’t accurately reflect economic realities.
However, Deputy Prime Minister and Foreign Minister Ishaq Dar holds a dissenting view. He believes the rupee is undervalued by at least 15%. Currently,the rupee trades above Rs279 to the dollar,a rate that has held relatively steady for several days.
The EAC, chaired by Prime Minister Sharif, includes prominent figures such as Jehangir Khan Tareen, Saqib Shirazi, Shehzad Saleem, Musaddiq Zulkarnain, Dr. Ejaz Nabi, Asif Peer, ziad Bashir, and Salman Ahmed.According to officials, some EAC members, many of whom are exporters, argued that the overvalued rupee is making their exports less competitive.Finance Minister Muhammad Aurangzeb reportedly assured the council he would raise the issue with the State Bank of Pakistan (SBP), the country’s central bank and exchange rate regulator.
A meeting participant noted that some EAC members seemed to prioritize their own business interests, raising concerns about micro-level issues deemed inappropriate for the discussion. The council also highlighted a concerning decline in foreign exchange reserves, which fell by $1 billion to $11 billion by the end of last week.
Despite the ongoing International Monetary Fund (IMF) program,Pakistan’s foreign exchange reserves remain low due to a lack of critically vital new foreign inflows. The SBP has been actively managing reserves by purchasing dollars from the market, totaling $9 billion in the past year. However, this capacity was limited in January following a $420 million current account deficit. the SBP is acquiring dollars by retaining portions of export proceeds and foreign remittances.
The central bank maintains that import restrictions have been lifted, allowing duty-free imports of cotton to address supply shortages. Duty-free imports are also permitted for textile machinery, spare parts, and raw materials not produced domestically. Despite these measures, the current account showed a surplus of $700 million during the first seven months of the fiscal year, driven by $19.2 billion in exports.
Some EAC members suggested importing raw sugar for refining and re-export. One member with export interests recommended eliminating sales tax on imported raw materials, citing misuse of the Export Facilitation Scheme following the imposition of such taxes.
The prime minister also highlighted efforts to make local industries capable of competing in the international markets with their exports,
a press statement said.
Prime Minister Sharif also emphasized ongoing consultations on regulating digital currencies. The EAC believes that investment will only increase once the overall investment climate improves and local investors begin participating more actively, according to meeting participants.
A statement from the Prime Minister’s Office indicated that the EAC expressed full confidence in the government’s economic policies and offered key suggestions to further strengthen pakistan’s economic growth. sharif instructed relevant authorities to collaborate with the council to develop an extensive action plan based on these suggestions. He stressed that economic stability requires collective effort.
The prime minister also underscored the importance of regional trade potential. He listed industry, agriculture, data technology growth, job creation, and export growth as top government priorities. Efforts are underway to improve telecommunication services and expand internet access to remote areas, aiming to boost the number of freelancers and IT exports.
Pakistani Rupee Surge: A Catalyst or calamity for Economic Growth?
Editor: In Pakistan,the strengthening rupee is raising eyebrows and alarms alike. Selina Rao, an expert in South Asian economic affairs, joins us to delve into the complexities of this issue. Selina, to start, what do you think about the Economic Advisory Council’s concerns over the rupee’s impact on export competitiveness?
Selina Rao: The notion that a strengthening rupee might undermine export competitiveness isn’t unique to Pakistan. globally, a stronger currency can make exports more expensive on the international market, as seen in past scenarios with currencies like the Japanese yen or the Swiss franc. For Pakistan, this situation becomes critical since exports are pivotal to their economic growth. When the Real Effective Exchange Rate (REER) indicates overvaluation, it means the local currency does not accurately reflect the economic condition.this can lead to an imbalance that stifles businesses dependent on export-driven revenues.
Editor: Some experts, like Deputy Prime Minister Ishaq Dar, believe the rupee is undervalued by at least 15%. How can such divergent viewpoints be reconciled?
Selina Rao: Economic perceptions can substantially vary depending on priorities and nuances in economic theory. Diverging opinions often stem from different interpretations of economic indicators or goals. For instance, an undervalued currency can boost exports by making them cheaper abroad, which may be favorable for a government aiming to increase export volumes and reduce trade deficits. Conversely, an overvalued currency, as seen from the viewpoint of an advisory council focusing on long-term competitiveness, can harm those same export sectors. Reconciliation requires aligning short-term goals with long-term economic strategies, often focusing on a balanced exchange rate that supports both exports and imports equitably.
Editor: The council is pushing for Prime Minister Sharif to address the exchange rate situation alongside a decline in foreign exchange reserves.What implications do these reserves have for economic stability?
Selina Rao: Foreign exchange reserves are the bedrock of a nation’s economic credibility.They are critical in maintaining currency stability, managing external debt, and absorbing financial shocks. A declining reserve level, as witnessed in Pakistan, signals reduced confidence, puts pressure on the rupee, and heightens vulnerability to speculative attacks or global financial instability. This is exacerbated when reserves dwindle while supporting essential imports, such as energy and raw materials, without commensurate inflows of foreign currency. Enduring management of these reserves often involves implementing policies to ensure steady foreign inflows, such as encouraging investment and exports.
Editor: Given that the current account showed a surplus driven by $19.2 billion in exports, how can Pakistan balance this with the challenges posed by the overvalued rupee?
Selina Rao: Achieving this balance requires a multifaceted approach. 1. Export Enhancement: Pakistan should invest in diversifying its export base, improving product quality, and entering new markets to mitigate the impacts of exchange rate fluctuations. 2. Import Management: Strategic import restrictions can preserve reserves while still allowing essential inputs for production. 3. Foreign Investment: Creating a conducive investment climate, with clear regulatory frameworks and incentives, can attract vital foreign inflows. 4. Productivity improvements: By increasing domestic productivity and innovation, local industries can remain competitive despite currency disparities.
Editor: The Economic Advisory Council has expressed confidence in the government’s economic policies. Can you elaborate on the strategies that may bolster this confidence?
selina Rao: Confident economic policies often stem from comprehensive and adaptive strategies that address both immediate challenges and long-term goals.For Pakistan, this includes fostering regional trade potential to widen the market for goods and services. Strategic Investments: Prioritizing industries like details technology, agriculture, and manufacturing can lead to increased job creation and export growth. Digital Initiatives: Enhancing telecommunications and expanding internet access can boost IT exports and digital economy contributions.Regulatory Reforms: Streamlining processes and eliminating stumbling blocks for business operations can incite local and international investor confidence. institutional Strengthening: Reinforcing institutions like the State Bank of Pakistan to function transparently and effectively can anchor economic policies through disciplined fiscal and monetary management.
Editor: Let’s conclude by exploring the potential long-term benefits of regulatory measures on digital currencies within pakistan’s financial landscape.
Selina Rao: Digitization in finance presents a meaningful opportunity for growth and modernization. Effective regulation of digital currencies can foster innovation while safeguarding against risks such as fraud and volatility. Potential benefits include:
- enhanced Financial Inclusion: Digital currencies can reach unbanked populations, offering them access to financial services.
- Faster Transactions: Reduced transaction times and costs can enhance trade and economic activity.
- Transparency and Security: Well-defined regulations can reduce crime associated with unregulated digital currencies.
- Attracting Tech Investments: by positioning Pakistan as a forward-thinking market, more tech investments and partnerships are likely.
To sum up, while challenges abound, the path towards an economically stable Pakistan involves a blend of strategic policy, innovation, and inclusive growth initiatives. These efforts will be pivotal in making local industries competitive on the global stage.
What are your thoughts on balancing currency competitiveness with export growth strategies? Join the conversation below or share this insightful discussion on social media!