Foreign currency outflows are worsening the economic crisis in Pakistan as millions of US Dollars are smuggled into Afghanistan from Pakistan every day, which has made the Afghan Afghani (AFN) one of the best performers in the world over the past 12 months, while the Pakistani Rupee (PKR) is among the worst.
These illicit inflows are providing massive relief to Kabul’s strained economy after the United States and Europe denied the Taliban regime access to billions of dollars in foreign reserves, according to a report in Bloomberg.
The Exchange Companies Association of Pakistan (ECAP) General Secretary Zafar Paracha told the publication that traders and smugglers are bringing as much as $5 million across the border every day. That more than covers Afghanistan’s central bank’s weekly injections of up to $17 million into the market.
After the Taliban takeover of Kabul in August 2021, the United States and Europe blocked more than $9 billion in Afghan central bank reserves, fearing the funds would be used for terrorism. Under UN pressure, the US agreed to release half of it to help the economy, but this was put on hold after the Taliban prohibited Afghan women from attending school or working.
“Afghanistan has about a $10 to $15 million requirement on a daily basis,” said Khurram Schehzad, chief executive officer at Alpha Beta Core Solutions Private Limited. Half of this is estimated to come from Pakistan, he told Bloomberg.
Over the period, the Pakistani rupee has lost approximately 37 percent against the US dollar, making it one of the most significant declines. It fell 10 percent in one day in late January, the biggest drop in at least two decades, as the crisis-hit government relaxed its grip on the currency in an attempt to secure much-needed IMF loan.
Afghan Currency Thrives While PKR Crumbles
Since last year, the AFN has gained about 5.6 percent against the US dollar, one of the best performances of any currency in the world. After reaching an all-time low of 124.18 in December 2021, a few months after the Taliban reclaimed power, the Afghan currency has recovered to around 89.96 per dollar. Meanwhile, the PKR has dropped to over four times that of AFN to 275.3 against the greenback.
Smuggling really took off in the middle of last year after Afghanistan increased coal exports to energy-hungry Pakistan. It has also benefited from the Taliban’s ban on the use of the PKR as legal tender in Afghanistan, which forces exporters to trade in dollars and bring the US currency back to the country.
The Taliban encourage traders to bring any amount of cash in dollars but have reduced the maximum dollar transfer allowed out of the country by half to $5,000, according to Ahmad Wali Haqmal, a finance ministry spokesman.
But ECAP’s Zafar Paracha argues that the problem is Pakistan’s flawed immigration, trade, and border controls. Thousands of people cross the border without visas every day, and many of them have cash on them.