THE policy of keeping the rupee-dollar exchange rate fixed over extended periods of time, despite manifest signs of currency overvaluation, has not served Pakistan well. The parity was held around 60 during the Musharraf era, and around 100 in the recent Dar era. In both cases, unsustainable external deficits emerged, culminating in balance-of-payments crises requiring large shock devaluations and foreign bailouts to fix.

These intermittent currency crises are a major impediment to Pakistan’s long-term prosperity. They incentivise businesses to focus on short-term returns rather than long-term investments to boost the country’s economic potential. They deter foreign direct investors demanding macroeconomic stability and policy continuity as prerequisites. And, they weaken Pakistan’s geopolitical standing and sovereignty (bailouts are never a free lunch).

Yet, despite these nontrivial costs, we hardly see any ‘real-time’ opposition to this fixed rupee-dollar policy while it is in full implementation. One cannot recall any commentators (other than IFIs) clamouring for timely adjustment of the rupee during the Musharraf and Dar eras. And if this government decided to stabilise the exchange rate at 150 for the next three years, one expects few to object. Why? Because, unfortunately, the political economy is supportive of such a policy.

Pakistan’s opinion-makers are major beneficiaries of an artificially low rupee-dollar rate.

Pakistan’s opinion-makers are major beneficiaries of an artificially low rupee-dollar rate: it subsidises their spending on luxury imports (such as SUVs), children’s education abroad, and vacation travel. The masses don’t protest, as the more affordable import prices and lower inflation associated with an overvalued currency imply a quality of life improvement of sorts, albeit short-lived. Financing of the resulting higher imports/external deficits is also easier under a fixed parity as global banks generally lend in dollars.

One can ask why exporters do not protest the overvaluation policy. They probably do, but after years of import bias, the export lobby has weakened, and is overtaken in foreign exchange terms by overseas Pakistanis, whose remittances are largely insensitive to exchange rate movements.

The only way to break this unholy bias in favour of a low/fixed rupee-dollar parity is by raising awareness about its economic flaws and costs; and articulating an alternative currency regime to serve a volatile emerging market well. To this end, let’s examine why a fixed rupee-dollar parity makes little economic sense for Pakistan.