On Wednesday, the Exchange Companies Association of Pakistan (ECAP) removed the cap on the U.S. dollar’s exchange rate. This prompted the Pakistani rupee to fall by 1.2 percent, to 243 against the U.S. dollar on the open market. The interbank exchange rate remained 231.7 on Wednesday.
On Thursday, the rupee tumbled even more, losing a further 9.6 percent of its value. By the end of the day, it was trading at 255.4 rupees to the dollar, a record low.
The ECAP’s unilateral move highlighted the fact that there are three effective exchange rates in Pakistan, with the black market trading the greenback for around 270 rupees over the past couple of months. The exchange rate spectrum, which is hindering manufacturing, exporting, remitting, and even everyday banking in Pakistan, is the consequence of Finance Minister Ishaq Dar’s fixation with a fabricated exchange rate, and his vow to “bring the dollar below 200” after taking charge in September.
Dar’s plan was to repeat the monetary policy from his previous term, whereby a portion of the foreign exchange reserves was to be pumped into the currency market to forcibly stabilize the rupee, in turn hindering exports. This plan had special incentives for the ruling Pakistan Muslim League-Nawaz (PML-N), which is teetering on the edge of political extinction ahead of the upcoming general elections.
However, the expected foreign investments and loans haven’t materialized, while the State Bank of Pakistan’s reserves have fallen to $4.1 billion, providing barely three weeks’ worth of import cover. The prospect of sovereign default in inching closer to reality.
“Whatever the government’s plan was, it clearly isn’t working, because there are no dollars in the market now,” Hassan Abbas from the Pakistan Currency Exchange told The Diplomat. “Customers are only coming to the counter to purchase dollars, not to sell.”
“They tell us that since they can sell the dollar for over 260 in the black market, why would they sell it here in the open market for 240?” he added.
And much of what is dubbed the black market is dominated by a flow of U.S. dollars across the Afghanistan-Pakistan border, unifying the economic crises of the two perpetually hyphenated countries.
After Pakistan’s two-decade long push for the Taliban’s return culminated in the jihadist regime’s takeover of Kabul in 2021, Afghanistan’s banking system collapsed. The United States freezing of the central bank funds and the retraction of foreign funding by global powers, which constituted 45 percent of the country’s GDP, has caused a severe liquidity crisis over the past year-and-a-half. The United Nations warned last year that 95 percent of the Afghan population was facing malnutrition.
The fast-aggravating fiscal crises in Afghanistan and Pakistan further streamlined the already informal integration of the undocumented economies seeking to defy global statistics by spinning the fiscal wheel off the books. While this underground trade has helped sustain populations on either side of the Durand Line, it has also buttressed a macroeconomic menace: an Af-Pak dollar cartel.
While official figures put the informal Af-Pak trade figure at $2 billion in 2019, prior to the Taliban takeover, Exchange Companies and Forex Association Chairman Malik Mohammad Bostan claims that amount of trade is now being illegally conducted on a monthly basis. A Pakistan government report claims up to $70 million worth of U.S. dollars are being smuggled into Afghanistan every month. This means any commercial activity between the two countries through an official channel translates into a loss.
“The [official] trade is shutting down, people are incurring losses, many are becoming jobless. We have been asking the stakeholders to address this for a long time, but no one is listening,” said Zia-ul-Haq Sarhadi, coordinator of the Pak-Afghan Joint Chamber of Commerce and Industry.
Various merchants and businesspeople from Afghanistan and Pakistan spoke to The Diplomat about the difficulties posed by the customs authorities at both ends. “The Taliban officials often seize the currency that we are trying to take to Pakistan to purchase goods. The official documentation has become redundant,” revealed one Kandahar-based trader. The Taliban regime has banned the Pakistani currency’s use in Afghanistan, limiting exchanges to holding a maximum of 500,000 rupees.
Pakistan has put a $1,000 hard currency cap per visit to Afghanistan. Traders coming from Afghanistan are required to carry their export business license, invoice, and currency to the Torkham or Chaman border, where Custom Appraisement issues the declaration mandating the depositing of the payment in a Pakistani bank.
“Many times that money is never deposited in the Pakistani banks and is smuggled back into Afghanistan because the invoices and documentations are faked with the involvement of money exchangers,” Sarhad Chamber of Commerce and Industry Vice President Shahid Hussain told The Diplomat.
The money exchangers on both sides of the Durand Line have bolstered the currency cartel by manipulating trade, both actual and forged – the latter being a primary route for dollar smuggling. Currency notes are often hidden in vegetable trucks with perishable goods, often easily passing through the Green Channel dodging customs scanners. The U.S. currency has been smuggled via food items ranging from orange crates to beetle nut sachets.
“It’s the same eight to ten people involved in monopolizing dollar smuggling that have long used the hawala system to monopolize currency in the region,” added Hussain.
The hawala system involves the transfer of money without any physical movement of cash or documentation. While centuries ago it allowed individuals to conduct transactions in faraway locations, today it helps sustain a parallel economy without any government regulations, in turn maintaining ground for illegal monopolization by cartels. And, as a result, the hidden, yet powerful, Af-Pak dollar cartel has propped itself up by capitalizing on the forex shortage in the two countries.
In interviews with The Diplomat, money exchangers in both Afghanistan and Pakistan insisted that the dollar cartel isn’t a monolith, and sustains itself with cooperation between sections of the traders and currency markets. A consistent exchange rate is used for systematic hawala transactions, with anyone involved in the currency trading business along the Af-Pak border being a participant, active or passive.
“We deserve the cut that we get in all this since the market forces determining the interbank exchange rate do not factor in the violent forces enforcing their own regulations,” said an exchanger from Kabul’s Sarai Shahzadeh market, one of the hubs for the dollar cartel’s dealing, along with Peshawar’s Sarafa Bazaar. Those working in these markets, which face regular crackdowns from the respective regimes, further reveal how sections of the authorities that are clamping down are simultaneously facilitating the cartel.
“Of course, the Pakistani border forces too are involved in the illegal trade with Afghanistan,” former Finance Minister of Pakistan Salman Shah told The Diplomat. “Similarly, many times, the Afghanistan-Pakistan Transit Trade Agreement is misused by authorities, where goods never arrive in Afghanistan and are consumed in Pakistan without any duties and taxes. But these transactions allow Afghanistan to finance other goods. This is how the unofficially integrated [Af-Pak] economy is sustained.”
Now, with Afghanistan drained of war dollars, and Pakistan’s foreign funding drying up after its usefulness for Western powers plunged following the Afghan Taliban’s assertions of independence, the unregulated, undocumented, Af-Pak economy is giving the two formal economies a run for their money. And the dollar cartel is at the forefront of those profiting from the chaos.