Thursday November 30, 2023

Currency volatility

October 03, 2023

LAHORE: The Afghan currency is almost maintaining its value against the US dollar after a sudden depreciation of almost nine percent on September 8, when Pakistani authorities stopped dollar smuggling. This indicates that more efforts are needed to control dollar outflows.

The Afghani jumped to 80.50 on September 7 from three days earlier at a value of 72 against the US dollar. Thereafter, the currency remained range-bound and was trading at 78.29 on October 2.

Though our economy is in bad shape, the Afghan economy has never been in good shape. Its currency was traditionally rated much weaker than the Pakistani rupee. But in the last decade, Afghan currency started becoming stronger; first on Western powers’ inflows and then through officially sanctioned illegal trade.

Under this sanctioned trade, goods imported to Afghanistan at zero duty were smuggled into Pakistan. In many cases the containers carrying Afghan imports were unloaded illegally in Pakistan and disposed of in the markets.

The government has attempted to tackle the smuggling of dollars to Afghanistan. However, this is just one avenue that hurts our economy when it comes to Afghanistan. There are so many avenues that hurt our economy and industries because of illegitimate trade conducted through Afghanistan.

We must plug all these avenues to give our industries a chance. The Pakistani currency would appreciate to its actual value if all illicit trades are effectively curbed. Afghan currency should be a barometer in this regard because the country’s actual economy does not warrant that the Afghani should be stronger compared to the Pakistani rupee.

If the government’s actions are perceived positively by the market and investors, it can boost confidence in the domestic economy. Investors might feel more secure about the stability of the currency and the overall economic environment, which can prevent further depreciation.

Consistent and credible policies from the government and central bank can instil confidence in the currency. If the government's actions against illegal activities are seen as part of a broader commitment to economic stability, it can have a positive impact.

If the supply of dollars to Afghanistan is kept in check both by curbing dollar smuggling and also by eliminating the menace of smuggling, the currency’s value can be maintained. The state authorities must realise that smugglers use dollars to buy foreign goods. They must also be knowing that the amount of under-invoiced goods is paid for in dollars to the foreign suppliers.

Adequate foreign exchange reserves held by the central bank can be used to stabilise the currency’s value. But we do not have adequate foreign reserves. These are in fact maintained by loans from friendly countries. If that were not the case, these reserves could have been used to intervene in the foreign exchange market, buying or selling the local currency to influence its value.

The government’s fiscal policies (related to taxation and spending) and the central bank’s monetary policies (related to interest rates and money supply) play a significant role in shaping a country’s economic environment.

Well-balanced and effective policies can contribute to currency stability. Our fiscal policy needs massive overhaul that requires courage as it would impact the privileged groups. It is important to note that maintaining a stable currency value is a complex task influenced by a wide range of economic, political, and social factors.

Without specific and updated information on the current situation in Afghanistan, it is challenging to find out the exact routes and avenues through which dollars go out of Pakistan.

Under-invoicing has got nothing to do with Afghanistan directly, but it is possible that the dollars needed for under-invoicing are arranged through Afghans. Continued smuggling and under-invoicing certainly indicate that the hawala and hundi business is still going on clandestinely.