The ongoing FIA crackdown on illegal dollar sales has once again revealed the fragility of Pakistan’s foreign exchange regime. Licensed exchange firms confirm that official dollar sales have collapsed by more than half in recent weeks, as demand migrates back to hawala and hundi networks. With authorities capping cash purchases at $500 without documentation, genuine buyers are forced into the curb market, where the dollar trades at a premium of up to five percent over the interbank rate.
We have to realise how these distortions violate the IMF’s programme condition that the interbank-open market spread must remain within 1.25 percent. The persistence of such a gap is diverting remittances away from banks, eroding official reserves, and fuelling capital flight. By some accounts, large volumes of dollars are being smuggled across to Iran and Afghanistan, where regional arbitrage yields higher returns. FIA seizures of Iranian rials and Afghan afghanis in Karachi and Quetta are stark confirmation that Pakistan’s borders remain porous to illicit currency flows.
The short-term optics of raids are deceptive. Arrests and currency seizures may briefly strengthen the rupee, but the underlying drivers of demand for the black market remain untouched. High import tariffs incentivise under-invoicing, strict withdrawal controls encourage traders to bypass banks, and a persistent lack of confidence that the rupee’s value will be market-determined rather than administratively managed keeps pressure on the system.
The State Bank’s approach has been equally contradictory. Reserves have been rebuilt to around $14.5 billion, aided by IMF inflows and bilateral rollovers. Yet heavy dollar purchases, over $9 billion in just nine months, have drained liquidity from the market, pushing customers to unofficial dealers. This self-defeating cycle must end if confidence is to be restored.
The way forward lies in structural correction, not episodic enforcement. Exchange-rate management must commit to a unified, market-clearing rate. Unless the interbank-open market gap narrows, the curb market will continue to thrive. Documentation rules must also be rationalised. A rigid cap without flexibility has merely shifted transactions underground; compliance should be risk-based, not bluntly restrictive. At the same time, remittance flows must be made attractive through competitive rates and streamlined channels, so that overseas Pakistanis are not tempted by hundi operators.
Border enforcement and FIA raids are necessary, but they are no substitute for credible policy. Unless exchange-rate management is depoliticised and regulatory frameworks are aligned with IMF benchmarks, the grey market will persist. What is at stake is not only the stability of the rupee but also the credibility of Pakistan’s economic governance.
