An Anatomy of Pakistan’s Exchange Rate Regime

OGDCL–IPRI Chair Economic Security Research Paper by Zafar Masud, Dr. Aneel Salman, Muneeb Shah, Maryam Ayub and Sayem Ali — June 2025

This paper, ‘An Anatomy of Pakistan’s Exchange Rate Regime‘ —coauthored by Zafar Masud and others—conducts an empirical analysis to assess whether the ER (exchange rate) is market-driven. It also shares proposals to make ER management more transparent and sustainable.

Executive Summary

Proponents of a free-floating or market-driven ER regime have argued that distortionary CB interventions in the foreign exchange (FX) market alter the ER trajectory. Historically, evidence shows such interventions result in ER misalignment, eventually leading to the widening of the trade deficits and balance of payment challenges.

Over the past year, the PKR stability has raised questions regarding the ER misalignment. The surplus in the Current Account, with an increase in exports and remittances, apparently supports the notion that market dynamics drive stability. However, concerns remain that administrative measures to curtail imports, coupled with distortionary CB interventions, are affecting the ER regime.

This paper conducts an empirical analysis to assess whether the ER is market-driven. It also shares proposals to make ER management more transparent and sustainable.

Objectives and Methodology

Using a comprehensive VAR model, multiple ER-based indices, and global and regional macroeconomic indicators, this Paper:

• Explores the sustainability of PKR stability and the extent to which the ER is market-driven.
• Provides recommendations for establishing an optimal ER regime for Pakistan.

Key Findings

The findings of this Paper highlight that Pakistan’s ER is not entirely market-driven. Despite significant changes in the ER leading indicators, such as a 30% change in the inflation rate, a 1000 bps (10%) decline in the policy rate, and significant fluctuations in the current account, terms of trade, and FX reserves, the ER has remained constant around PKR 279.

Policy Recommendations

There is evidence to show that the balance of payment crisis faced frequently over the last two decades has been driven by an expansionary fiscal policy, leading to multiple bailouts from the IMF. To move towards an independent monetary and a market-based ER regime, the government may adopt measures to rein in the large fiscal deficits, including the losses of the SOEs. However, overly contractionary fiscal measures can also dampen economic growth. Therefore, a balanced fiscal strategy is necessary that emphasises reducing unproductive spending while protecting growth-promoting investments.

A volatile rupee, however, disrupts the economy through multiple channels and may need to be contained. However, FX intervention may not be used as a pretext for securing unfair socio-economic or political advantages, such as incentivising particular export industries, limiting imports to protect an inefficient domestic industry, or favouring particular interest groups.

The SBP may

• Manage the ER within a specific band or range, focusing on reducing immediate risks rather than acting as a market participant influencing broader economic cycles.
• Publish a clear FX intervention policy framework that details when and how it will intervene to maintain stability.

Complete Research Paper

About the Authors

Zafar Masud

Zafar Masud is an international banker and entrepreneur, currently serving as a Member of the Board of Governors at the Islamabad Policy Research Institute (IPRI). With extensive experience in senior roles at multinational banks in Pakistan and abroad, he has also contributed to the IMF’s Task Force on Framing SOE Law, established by the Ministry of Finance. Drawing on his deep expertise in banking and finance, Zafar regularly writes for local media on topics such as finance, economics, and energy. He is the author of two publications: “Out of the Box,” an eBook compiling his articles, and “PK8303 – The Plane Crash Survivors Account,” detailing his survival of a plane crash in May 2020.

Dr. Aneel Salman

Dr. Aneel Salman holds the distinguished OGDCL-IPRI Chair of Economic Security at the Islamabad Policy Research Institute (IPRI) in Pakistan. As a leading international economist, Dr Salman specialises in Monetary Resilience, Macroeconomics, Behavioural Economics, Transnational Trade Dynamics, Strategy-driven Policy Formulation, and the multifaceted challenges of Climate Change. His high-impact research has been widely recognised and adopted, influencing strategic planning and policymaking across various sectors and organisations in Pakistan. Beyond his academic prowess, Dr Salman is a Master Trainer, having imparted his expertise to bureaucrats, Law Enforcement Agencies (LEAs), military personnel, diplomats, and other key stakeholders, furthering the cause of informed economic decision-making and resilience.

Mr. Muneeb Shah

Mr. Muneeb Shah is a Research Associate at the OGDCL–IPRI Chair Economic Security at the Islamabad Policy Research Institute (IPRI). His areas of expertise include the blue economy, international trade, monetary economics, the Balochistan economy, the informal economy, and national & regional accounts compilation. Mr. Shah also has strong expertise in quantitative and data-driven policy analysis, with his work involving the application of advanced econometric techniques to support evidence-based decision-making.

Syed Sayem Ali

Syed Sayem Ali is an experienced economist with a deep understanding of Pakistan’s economic landscape. He has contributed significantly to discussions on economic policy, energy dependency, and fiscal challenges. Throughout his career, Sayem has held senior roles in various multinational financial institutions, bringing a wealth of knowledge and expertise to his work. He is also an active commentator on economic issues, regularly contributing to local media on topics such as finance, economics, and energy. His insights have been influential in shaping economic thought and policy in Pakistan. Additionally, Sayem is an academic who has taught at the Institute of Business Administration (IBA) Karachi, further enriching his contributions to economic thought and policy in the country.

Maryam Ayub

Maryam Ayub holds an MPhil in Economics and Finance from the Pakistan Institute of Development Economics (PIDE). Her areas of expertise are Macroeconomics, Climate Finance and Development Economics.

Acknowledgement

The authors express their sincere gratitude to Dr. Atiq-ur-Rehman, an Associate Professor at the Kashmir Institute of Economics, University of Azad Jammu and Kashmir, Dr. Hafsa Hina, HoD and an Assistant Professor at the Pakistan Institute of Development Economics, Mr. Nouman Khan, an MPhil in Econometrics from Pakistan Institute of Development Economics, Mr. Sheraz Ahmad, a Research Associate at the OGDCL–IPRI Chair Economic Security at the Islamabad Policy Research Institute (IPRI), and Dr. Khurrum Mughal, Economist and former State Banker, for their valuable comments and insights, which significantly enhanced the quality of this paper.