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

Your grocery bill goes up. 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.

But sit with it for a second. Why should a currency printed in another country decide what tomatoes and potatoes cost in your street? 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? 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

Imagine Pakistan is a house, and a house needs income to run. 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.

We import oil, machinery, edible oils, medicine, the things the country simply cannot run without. 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.

If the oil stops, the industry stops, the growth stops, because we don't produce that oil ourselves, we have to buy it. Let those reserves run low and we can't pay, and when we can't pay, everything downstream starts to break.

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. It's the one bill the house can never stop paying.

Today's dollar rate is not an accident

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. 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. So we chose not to devalue, because a stronger rupee kept imports cheap.

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. When a country is on a fixed exchange rate and its central bank chooses to lower the currency's value, that's a devaluation. 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.

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. 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.

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.

When the dollars coming in and the dollars going out are roughly in balance, inflation and the rupee stay calm. 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. 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. And crucially, it folds in inflation, not just the dollar rate.

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 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. 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. When the market finally corrected it, the rupee fell 30 to 35% within the span of a few months.

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. The second one is called the fiscal deficit, and it's the household version of the government spending more than it earns. Put the two shortfalls side by side, the trade one and the spending one, and you get what's called a twin deficit.

Both gaps get filled the same way, with borrowing. 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. 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. Whoever is in power has five years to make decisions people will applaud, so they reach for the short-term move every time. 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. 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.

We say, just give us something for right now, a dose, a tablet, anything that makes the immediate pain go away. And we agree to the IMF's 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. 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. 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

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. 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.

But watch what actually happens in an economy built like ours. Our major exports depend on imports. 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.

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.

Where a falling rupee quietly makes someone money

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.

This is not a buy or sell call, and it isn't financial advice. 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. 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. 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.

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 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.