Pakistan’s economy is trapped in a dangerous illusion: the illusion of stability created by a “stable” rupee. This perceived strength, sustained through administrative controls and political signalling rather than economic fundamentals, has become a silent killer on exports and a key driver of widening trade imbalances. What appears stable on the surface conceals deeper vulnerabilities: shrinking export competitiveness, rising imports, and a consumption-led growth model unsupported by productivity or reform.
The recent improvement in some macroeconomic indicators should not be mistaken for structural progress. These gains are largely ad hoc and cyclical, not the outcome of reforms in productivity, taxation, energy pricing, logistics, or export competitiveness. Pakistan has followed this path before — artificially supporting the currency until external pressures mount, the current account deteriorates, and the rupee eventually corrects sharply, inflicting greater economic pain.
A stable currency is not inherently harmful. But when domestic inflation runs higher than that of trading partners and the exchange rate is held rigid, exports steadily lose competitiveness. Over the past three years, the cost of Pakistan’s growers, manufacturers, and exporters has surged — energy tariffs, wages, financing costs, taxes, and compliance burdens have all risen sharply. Exchange rate adjustment, the most direct price-correcting mechanism, has been largely avoided.
The State Bank’s policy emphasis on containing imported inflation through a stable rupee coincided with historically high interest rates. While this may have moderated short-term price pressures, it significantly eroded export competitiveness. Exports compete on price, quality, reliability, and market access. On all four counts, Pakistan is under pressure, especially when compared to regional peers who actively manage costs and exchange rate alignment.
Exports compete on price, quality, reliability and market access; however Pakistan is under pressure on all four counts due to its currency
The logic behind falling exports is straight forward. Domestic costs increased sharply, the exchange rate remained broadly fixed around Rs280, export prices in dollar terms rose, and international buyers shifted to cheaper suppliers. When this happens, a “stable” currency becomes overvalued in real terms. What matters is not nominal stability but alignment with regional competitors. An appreciating real effective exchange rate hurts exports far more than moderate exchange rate volatility.
Pakistan’s failure to adjust the rupee in line with peers such as India, Bangladesh, Vietnam, Indonesia, and Cambodia has resulted in a double squeeze on exporters: rising domestic costs without any currency cushion. These countries allow gradual depreciation, keep energy relatively cheaper, offer export facilitation, and invest in logistics, including rail and waterways that reduce fuel dependence. Pakistan has done the opposite.
The damage is most visible in price-sensitive sectors with thin margins — textiles and ready-made garments, Basmati and coarse rice, sesame seeds, maize, fruits and vegetables, and light engineering goods. Pakistan’s Basmati, a geographical indicator and premium quality product, is rapidly losing shelf space due to higher prices compared to Indian Pusa varieties.
Currency depreciation, however, is not a magic solution. A weaker rupee does not automatically boost exports if key inputs are imported; energy remains expensive, taxes continue to rise, refunds are delayed, productivity stagnates, and market access remains limited. That is why some countries experience repeated depreciation without export growth, importing inflation instead. The issue is not weakness or strength, but balance.
Currency stability works when inflation is low, productivity is rising, and export costs are controlled. Currency rigidity becomes harmful when inflation is high and trading partners are adjusting. Pakistan’s export slowdown reflects not just exchange rate misalignment, but a broader cost and policy failure. Attempts to substitute competitiveness through rebates such as DLTL cannot offset a misaligned currency combined with a two per cent withholding tax shift from Final Tax Regime to Minimum Tax Regime and additional super tax on higher exports.
Recent data underscores the problem. Pakistan’s trade deficit widened by over 28pc to $22.04 billion in 7MFY26. The current account deficit has returned after a surplus last year. Exports fell by over 7pc during the same period, while imports rose by more than 9pc. A strong rupee has simultaneously eroded export competitiveness and made imports more lucrative.
Exchange rate policy has increasingly been treated as a symbol of political pride rather than an economic tool. Artificial strength may temporarily suppress imported inflation and please urban consumers, but it encourages imports and penalises domestic producers. Pakistan’s economy increasingly rewards consumption over production. Cash-driven spending on imported goods, luxury consumption, and speculative assets continue to grow, while export-oriented industries struggle.
Across Asia, successful economies have treated exchange rate competitiveness as a strategic tool, not a source of pride. China, Vietnam, and Bangladesh maintained competitive currencies aligned with export growth, attracting investment and building manufacturing depth. Pakistan’s insistence on currency rigidity ignores these lessons, resulting in de-industrialisation and repeated balance-of-payments stress.
Pakistan must allow the rupee to reflect economic fundamentals through a genuine market-based or credibly managed float. A realistic exchange rate would restore export competitiveness, discourage non-essential imports, incentivise domestic substitution, and reduce rent-seeking distortions in the foreign exchange market. It would also encourage remittances through formal channels and investment into productive sectors rather than speculative or cash-based avenues.
Concerns about inflation from a freer exchange rate are valid but overstated. Pakistan’s inflation is largely structural — driven by inefficiencies, energy losses, cross border smuggling under reported exports via land routes, supply chain wastage, and weak governance. Artificial currency strength merely masks these problems. Like a painkiller, it suppresses symptoms while worsening the disease.
The way forward requires shifting from currency pride to economic prudence. Policymakers must reduce administrative interference, lower the cost of doing business, reform taxation, document the cash economy, rationalise imports, and support export diversification and value addition. A strong economy is built on competitiveness and productivity, not an artificially strong currency.
Allowing the rupee to find its true value is not a sign of weakness. It is a prerequisite for restoring balance, credibility, and sustainable growth. Only then can Pakistan move from a cash-rich illusion to an export-led economic reality.
The writer is former vice president of KCCI, commodities and international trade expert
Published in Dawn, The Business and Finance Weekly, February 23rd, 2026
