Currency smuggling to Afghanistan drains Pakistan's foreign exchange reserves

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Pakistan's foreign exchange reserves are quickly running out because US dollars are being smuggled into Afghanistan without any restrictions. This has forced Islamabad to put strict rules on imports and foreign currency transactions.

The fast-depleting reserves turned worse last week when the State Bank of Pakistan's (SBP) reserves dropped to an alarming level of $6 billion, the lowest since April 2014. The liquid foreign reserves held by the country stood at $12 billion as of December 16, including $5.88 billion held by commercial banks operating in the country.

Dollar shortage

The situation has gotten so bad that for the past few months, the central bank has not had enough cash on hand to pay the wages of its overseas embassies. However, the SBP claimed that the decline in reserves was the result of payments on external debt. It failed to explain why Pakistan's long-term sovereign credit rating was downgraded by S&P Global from "B" to "CCC+," indicating that the nation's external, fiscal, and economic metrics are continuously deteriorating. 

The foreign office is currently in a crisis-like situation as a result of Pakistan not having adequate reserves in its national coffers to pay the salaries for its missions abroad. This is because the country's finance ministry refused to grant funds despite repeated pleas.

When questioned about the situation on Thursday, a spokesperson for the Foreign Office (FO) said that Pakistan's missions abroad will soon start getting their salaries again. She added that the disbursement had been suspended because of a "very complicated" problem that the Ministry of Finance, the State Bank, and international channels were dealing with. She claimed that all missions abroad would soon receive the appropriate funding.

Exchange companies warning

The Exchange Companies Association of Pakistan (ECAP) said on Monday that there has been a significant outflow of US dollars from Pakistan to Afghanistan since the Taliban's takeover of Kabul last year. This confirms what has been a well-kept secret for months in Pakistan.

ECAP Chairman Malik Bostan stated at a press conference that Pakistan's foreign exchange reserves have been weakened by this situation. He claims that the currency rate has been impacted by dollar smuggling, phony imports, Islamabad's lack of concern for the issue, and some other factors.

Bostan noted that Pakistan's reserves were $22 billion and that one dollar was available for Rs. 155 when the Taliban seized control of Kabul. As of right now, the reserves are at their lowest point in around eight years. On the interbank market, a dollar now costs Rs. 225. "This unchecked flow of US funds toward Afghanistan has sparked a catastrophe in Pakistan," he added.

It transpired in the press conference, which was covered by Al Mayadeen English, that because Islamabad permitted Afghans to take $1000 per person per day and while 15,000 Afghans daily travel to Pakistan from the neighboring nation, thus, 15 million dollars are legally going to Afghanistan from Pakistan every day.

According to Bostan, it is illegal in Kabul to possess more than 0.5 million Pakistani rupees, and anyone found in possession of amounts above this limit faces prosecution under the money-laundering law. He claimed that the Kabul government had directed the Afghan business community to convert Pakistani rupees into dollars or other currencies.

"Afghans have been trading in Pakistani rupees for 42 years and possess hundreds of billions of rupees, which if converted into dollars and funneled back to Afghanistan, the currency market and economy would hit the rock bottom. They will drain off the entire dollar from Pakistani markets," Bostan warned, adding that Pakistan should take up this issue with Kabul.

Official version

Pakistan's finance minister has said in public that hundi-based currency dealings, speculative activities, and gambling are holding the country's financial system hostage and have brought foreign exchange reserves down to the bare minimum.

At a seminar in Islamabad last week, Senator Mohammad Ishaq Dar revealed that a significant sum of money is being smuggled out of Pakistan, mostly to its neighboring country, depleting the foreign exchange reserves. The senator warned that if no action is taken by the government, the situation will spiral out of control and put increasing strain on the nation's foreign exchange reserves. Dar also declared a clampdown on currency smugglers and holders of the illegal currency.

Swoop on smugglers

To stop the flow of money to Afghanistan, the authorities quickly began a full-fledged operation in the nation's largest cities. The Federal Investigation Agency (FIA) was dispatched to raid major cities, particularly Peshawar, which is close to the Afghan border, in a major effort to prevent people from smuggling money, especially dollars.

The Commercial Banking Circle (CBC) authorities of the FIA reported that since January 1, 2022, the organization has conducted about 257 raids and detained 305 people who are allegedly connected to the Hundi business in Peshawar. Additionally, they said that anyone caught smuggling money faced the appropriate legal penalties. The authorities claimed that so far, they have recovered local and international money totaling Rs. 666 million. Additionally, four plazas in Peshawar were sealed by the authorities on Sunday for operating illegal currency enterprises.

The agency detained many agents in Lahore who were engaged in unlawful "hundi" transactions, including the purchase and selling of foreign cash. The FIA raided them, took a sizable sum of foreign cash from them, and closed down several businesses that were engaged in the illicit sale and purchase of dollars.

Economic experts claim that the SBP’s rupee-dollar interbank parity of Rs. 224 will break at some point in the not-too-distant future. When the parity is broken, the rupee will depreciate significantly, causing widespread economic disruption. This means that Islamabad is bracing for a 20 to 25% depreciation, while the central bank is adamant about maintaining the current parity even though the dollar is not available in the open market at Rs 250.