Why the PKR keeps depreciating, and why Pakistan can't survive without the dollar

Your grocery bill goes up. Fuel goes up again a few weeks later, and the electricity bill lands heavier than last month. You ask why, and everyone from the sabzi wala to the anchor on the news gives you the same three words. Dollar barh gaya. The dollar went up. We've heard it so many times that some part of the mind has quietly filed it as a law of nature: dollar rises, prices rise, that's just how it is.

But sit with it for a second. Why should a currency printed in another country decide what tomatoes and potatoes cost in your street? Why does the price of something grown here in Pakistan move when a number changes in Washington? We accepted the explanation and never asked the question underneath it. What does dollar barh gaya actually mean, why is Pakistan hooked on dollars in the first place, and where does all of this sit inside the wider economic mess we keep hearing about?

These are simple questions, and the answers are simple too. It's just that nobody handed them to us plainly, and most of us never went looking. So let me trace the whole chain, from the price of your week all the way up to the door of the IMF, so that by the end dollar barh gaya stops being a magic phrase and becomes something you can actually follow, and in one case even read ahead of.

Think of Pakistan as one household

Start with something familiar. Imagine Pakistan is a house, and a house needs income to run. Money comes in, and out of that money you cover your expenses. The plain rule of a healthy home is that your expenses stay below your income, so the household stays comfortable. The moment your expenses climb above your income, trouble starts. First you cover the gap by selling whatever you own. And when there's nothing left to sell, you cover it by borrowing.

Zoom out and the country is running that exact household. Our income is what we export, and our expenses are what we import. Here the dollar enters, because the dollar is the reserve currency, the money the world trades in, and it sits inside the State Bank's reserves. Every time we buy something from another country, dollars leave those reserves and go abroad. Every time we sell something, dollars flow back in.

Look at what fills each column. We import oil, machinery, edible oils, medicine, the things the country simply cannot run without. Those are dollars going out. We export textile and IT services, and that's dollars coming in. When the outflow is bigger than the inflow, when we're buying more from the world than we're selling to it, the household is running a shortfall. Economists call that shortfall the current account deficit, and for Pakistan it has been there more or less forever.

The reason it matters so much is that we are an import-led country, and I mean that literally. If the oil stops, the industry stops, the growth stops, because we don't produce that oil ourselves, we have to buy it. So we always need dollars sitting in the reserves to pay for it. Let those reserves run low and we can't pay, and when we can't pay, everything downstream starts to break.

This is why you'll notice in the news that when the State Bank's dollar reserves are healthy, inflation is calmer and the rupee holds steady. The moment those reserves thin out, the pressure shows up in your bill first.

That's also where the borrowing comes in. To keep dollars flowing into the reserves, we go to the IMF, we go to other countries, we lean on remittances from Pakistanis abroad. As long as the reserves hold dollars, the household keeps running, whether the wider economy is doing well or badly. But the need for dollars never goes away. It's the one bill the house can never stop paying.

Today's dollar rate is not an accident

Here's a thing worth saying clearly. The rate you see today didn't drop out of the sky. It's the result of decades of decisions, and each crisis along the way left a mark on it. I was reading a study out of IBA that lays this history out properly, and it made the whole picture much easier to follow, so a lot of what comes next I owe to that paper.

Right after independence, we ran a fixed exchange rate, and back then the rupee wasn't tied to the dollar at all. It was pegged to the British pound. In 1949 England devalued the pound, and India followed by devaluing too. Everyone expected Pakistan to do the same. But we were in a particular spot: we had almost nothing to export, and we badly needed cheap imports to set up our own factories and get some growth going. So we chose not to devalue, because a stronger rupee kept those imports cheap.

You can hold that off for a while, but not forever. When the Korean war boom faded in the mid-1950s, currencies everywhere were being devalued and economies were struggling, and Pakistan finally had to devalue too. That's the first distinction worth getting straight, because two words get thrown around loosely. When a country is on a fixed exchange rate and its central bank chooses to lower the currency's value, that's a devaluation. It's a deliberate act. The State Bank sits down and decides.

Depreciation is a different thing. That happens when the exchange rate isn't fixed but variable, set by the market: how many dollars are available, how much demand there is for them, and the price falls out of that. Later our rate did become variable, with the market deciding the rupee's value, though the State Bank kept the ability to step in and steady it when it needed to.

Then came the sharpest scar. In 1998 Pakistan ran its nuclear tests in response to India's, and the trouble arrived almost immediately. Sanctions hit us. The dollar investment that had been flowing in stopped. With the inflow cut off but our imports still there, because we still needed the oil, the reserves came under real strain. On top of that the government froze the dollar accounts people held in banks, blocking them from converting dollars back to rupees, because the state itself was desperate for dollars. That created panic, and the panic pushed the rupee down hard while GDP growth stalled.

The picture only turned when Musharraf came in and, after 9/11, moved Pakistan to being an ally of the United States in the war on terror. The dollar inflows started again, trust in the country rose, remittances and investment returned, and the exchange rate steadied for a while.

The lesson underneath all of it is steady. When the dollars coming in and the dollars going out are roughly in balance, inflation and the rupee stay calm. Disturb that balance even slightly and inflation moves first, with every other problem following behind, because one way or another we need the dollar. When the dollar isn't there, the rupee falls, and the thing that cost you 200 rupees now costs 300. Not because the thing changed, but because your money is worth less against a dollar that stayed exactly where it was.

The hidden signal that shows the fall before it arrives

Now, our income depends on how much we can export, and here's a catch most people miss. The countries we sell to have options. If we're exporting something, India is probably exporting the same thing, and so is Bangladesh. So the buyer picks whoever is cheaper, and the plain dollar rate can't tell you who that is. Economists look at a second number for this, the real effective exchange rate, or REER.

What REER does is tell you how competitive your exchange rate really is compared to your trading partners and your rivals. And crucially, it folds in inflation, not just the dollar rate. Take a simple case. Suppose the rupee is pegged so a dollar buys the same as before, but your inflation is running at 20% while your trading partner's is at 5%.

Even with the rate held flat, that partner is now 15% cheaper than you, so the foreign buyer walks over to them. The dollar rate alone hid that completely. REER is what catches it, so in high-inflation countries the exchange rate never tells the whole story on its own.

You can read the number yourself. The State Bank publishes the REER index on its website. A reading of 100 means the rupee is fairly valued. Above 100 means it's overvalued, and that's where the danger sits. When REER climbs above 100, imports become cheap and exports become expensive. Cheap imports mean everyone's importing, expensive exports mean the income dries up, and the current account deficit widens. History has shown, again and again, that when that number runs high for a while, a sharp and painful devaluation tends to follow to bring it back down.

This isn't only an economist's toy. In 2017 the government fixed the exchange rate and held it there for a long stretch, and while it was held, REER climbed all the way to 120. That was a flashing sign that the rupee was badly overvalued and a correction was overdue, because imports had gotten too cheap and exports had all but stopped. When the market finally corrected it, the rupee fell 30 to 35% within the span of a few months.

Trace that down to your own life and you'll see why it's your number too. Your grocery and your fuel ride on it. If REER has run far above 100 and a correction is coming, the petrol that costs you 250 or 300 rupees a litre today, around the time I'm recording this, could sit closer to 400 tomorrow, purely because the currency was overvalued and the market came to collect. That's the whole point of watching it: it's the one part of this machine you can see moving before it reaches your pocket.

Two deficits at once, both paid for with loans

So far we've been talking about one shortfall, the current account deficit, imports forever larger than exports. But there's a second one running alongside it, and together they're what really trap us. It's called the fiscal deficit, and it's the household version of the government spending more than it earns. The government's income comes mostly from taxes, and our tax collection has always fallen short of what the state spends. Put the two shortfalls side by side, the trade one and the spending one, and you get what's called a twin deficit. Ours has been wide for a long time.

Both gaps get filled the same way, with borrowing. We go to the IMF, to other countries, to banks, and take loans to cover the difference. And here the trap tightens. A large chunk of the dollars we earn from exports doesn't get to do anything useful, because it goes straight back out as repayment on loans we already took, since we don't have other money to service them.

Another chunk goes to the imports we can't live without, the oil and the machinery. And after both, we still need dollars, so we borrow again to cover that need. We keep taking dollars in and handing them back, in and back, and there's no clean way out until the whole structure is rebuilt.

That rebuilding is exactly what nobody does, and the reason is almost boringly human. Real restructuring would hurt a great deal at the start before it helped, and no government can afford that pain, because in five years it's gone. Whoever is in power has five years to make decisions people will applaud, so they reach for the short-term move every time. Fix the dollar rate for a while, cut a small deal, take an IMF loan. The long-term solution, the one that's painful early and only pays off years later, sits untouched, because the government that swallows the pain won't be around to collect the reward.

We keep asking the doctor for a dose, never the diet

This is the pattern behind our endless trips to the IMF. We've gone to them over 20 times. India, by contrast, stopped going roughly 20 to 25 years ago and hasn't needed to since. Every time our dollars run low or we're near default, we go back, and the visit always has the same shape.

Think of the IMF as a doctor. The doctor looks at the patient and says the honest thing: fix your diet, do your exercise, change the way you live. That's the structural reform. But we don't want to hear it. We say, just give us something for right now, a dose, a tablet, anything that makes the immediate pain go away.

So the IMF does what it can. It tries to close the dollar imbalance, it pushes us to collect more tax, it puts conditions on the money, telling us to fix this and that. And we agree to the conditions, not because we intend to change how we live, but because we need the next instalment to avoid default and keep our payments moving.

The tax side shows the deeper problem. Over the years we handed a lot of industries very generous tax breaks, which are slowly being wound back now. But the effect of all that was to widen the gap rather than close it. The person who was already rich got the exemption and grew richer, while the person who was poor got taxed twice over and grew poorer. Nobody sat in a room and planned it as cruelty; it's what accumulates when short-term deals pile up over decades.

So the imbalance keeps running, the IMF keeps applying its light corrections, and the structural problems stay exactly where they were. The things we should be doing for ourselves, the IMF ends up forcing on us, and even then only halfway.

Why the textbook answer doesn't fit Pakistan

There's one more idea worth clearing up, because it sounds right and mostly isn't, at least not here. People will tell you that when your currency depreciates, your exports rise and your imports fall, so a weaker rupee is secretly good for you. The logic seems clean. If a thing you were importing for 250 rupees now costs you 280 because your money is worth less, you import less of it. And a thing you were exporting for 250 now earns you 280, so your export income goes up. On paper, a win.

But watch what actually happens in an economy built like ours. Our major exports depend on imports. We have to bring things in to be able to make the things we send out. So when the rupee falls, yes, our export earnings rise, but our import bill rises right alongside them, and the import bill is so large that the extra export earnings can't cover it. The gain gets swallowed. In a country where inflation runs high and the whole model is import-led, that neat textbook effect simply doesn't work, and a falling rupee ends up hurting more than it helps.

Which is why I won't hand you a tidy verdict here, because there isn't one. Depreciation isn't always bad, and appreciation isn't always good. What the country actually needs is a balance between the two, not a slogan pointing one way. That's the honest version, and it's less satisfying than the textbook line precisely because it's true to how the thing behaves.

Where a falling rupee quietly makes someone money

Here's the part that surprises people, and it grows straight out of everything above. Once you understand how depreciation works, you can see that the same force breaking the country's back is, for a specific kind of business, a tailwind. Think about a company that earns its revenue in dollars but pays its expenses in rupees. Software firms like Systems, NetSol or TRG largely fit that shape: the income arrives in dollars, the costs are local.

For a company like that, a falling rupee is a double benefit. Say it earns revenue worth 50 or 60 lakh against a certain number of dollars. If the rupee depreciates, that same dollar income now converts into 70 or 80 lakh in rupees, and the company didn't have to do a single thing to earn the difference. Its dollar figure stayed the same; your money just got weaker. And that's before you add any actual growth in the business from landing more clients. The thing hollowing out your grocery budget is padding their books.

I want to be careful here, because this is where people want a shortcut and there isn't one. This is not a buy or sell call, and it isn't financial advice. Which of these companies is actually well run is a separate question that needs proper fundamental analysis, and that's not my job on this channel.

My job is to give you the macro story, the shape of the whole machine, so you can connect the pieces yourself and then decide where to go and what to learn. Once the big picture is clear, you're in a position to judge whose specific advice is worth taking. That order, macro first, specifics second, is the whole method.

So the next time someone says dollar barh gaya

Go back to where we started, to the sabzi wala and the three words that explain everything and nothing. Dollar barh gaya was never wrong, exactly. It's just the last visible link in a long chain, and the whole time we treated that last link as the entire story. Now you can run the chain backwards: the price rose because the rupee fell, the rupee fell because we're an import-led household that spends more dollars than it earns, that gap runs on borrowing, the borrowing runs through the IMF, and none of it gets fixed because fixing it hurts before it helps.

And notice what that gives you back. At the start of this, the dollar was something that happened to you, a number in another country that reached into your kitchen without asking. By the end, one part of it is something you can watch: the REER, sitting on the State Bank's website, telling you when the rupee is overvalued and a fall is likely before the anchors have said a word.

You still can't move the rupee. But you're no longer standing at the sabzi stall with nothing but three borrowed words. You can see the machine, and you can see one of its levers move before it reaches you, and for a citizen at the mercy of all this, that small piece of sight is worth having.