In December 2021, with two months passed of reoccupying Afghanistan by the Taliban following a two-decade-long and deleterious war, the value of the Afghani rupee standing against the dollar was 124.18. This was when the US and her allies had blocked more than $12 billion of the Afghan central bank reserves, fearing that the new entrants at the helm of affairs would use it for terrorist activities.
Today, 19/6/2023, the Afghani rupee against the dollar stands at 86.14 rupees. Whereas, comparatively, in Dec 2021, when the Pakistan rupee stood at Rs 176.51, today, it is around at 300 against the dollar.
Several factors have been responsible and played a vital role in the devaluation of the Pakistan rupee against the dollar and, concomitantly, led to the rise of the Afghani rupee against the dollar.
Until the advent of the Taliban, Afghanistan had been a net exporter of dollars to Pakistan. This was until 2021 when the flow took a total reverse. According to a report by Dawn, there had been consistent and significant “flows of dollars from Pakistan into Afghanistan”. Around $15 m each day were brought by the traders and smugglers inside Afghanistan. For Pakistan, these illicit flows have exacerbated the country’s economic crisis. It completely disrupted the balance of payment crisis by lowering the concentration of dollars in Pakistan. While on the other hand, for Afghanistan, these illicit flows have saved the country from economic collapse.
Whereas, partly, the value of the Afghani rupee was kept stable by the humanitarian aid of the UN. UN was actively supporting the war-torn country through the provision of $40m per week. These funds were used for the state machinery to work effectively, without any hurdles. As a result, these dollars ended up in the central banks of Afghanistan. And partly the economy had been resuscitated through the customs tariffs imposed on the cross-border goods. As a result, it saved Afghanistan from economic defaults.
Furthermore, in Pakistan various dispensations artificially time and againdevalues the rupee. This is primarily done to make the exports of the country competitive, which in return spurs economic growth. However, this currency devaluation periodically increases the costs of imports. Consequently, this makes the prices of the commodities high which ultimately transcends into high inflation. This has to a great extent devalued our economy.
At the same time, political instability and uncertainty have also hampered the value of the economy. The frequent changes in the country’s governance has resulted in the abrupt changes of the financial teams that didn’t allow the economic policies to prosper. Resultantly, this caused the investors to be wary of their investments in the country, leading to a weaker exchange rate. According to PKRevenue estimates, in 1QFY23, foreign direct investment in Pakistan plummeted by 47%,
In addition, this political instability has also affected the stock market of Pakistan. There has been a persistent decline in the shares of the stock. This has resulted in a decrease in consumer and investor confidence, which in turn impacts spending and investment that reduces. Besides that, the government is also finding it hard to earn revenues from the taxes imposed on the investor’s money.
The macroeconomic policies, such as persistent trade, current account deficits, and high inflation, have also plunged the economy. For Afghanistan, the current account deficit (CAD) is normalized by UN aid and tariffs on customs. Nevertheless, for Pakistan, the current account deficit has deeply affected the value of the economy. The exports have plummeted while the imports are soaring. Thus, it has widened the current account gaps.
Being a member of the IMF, has to a great extent, also impacted the economy of Pakistan. It has never been left all alone to frame its policy independently. The stringent specific economic reforms, such as conditionality of reducing government spending and lowering inflation, have put significant pressure on our economy. Whereas, under the de facto rule of the Taliban, Afghanistan is not a part of the IMF program. Hence, it is making its economic policies independent of external actors.
Furthermore, after ascending to the throne of the powers, Taliban became aware about the importance of economy for the national power. They gave assurance and took the traders and merchants under their confidence claiming that they can work as per their normal routine, in return for the direct taxes imposed on their trades. Hence, this allowed the trade to function without any hurdles. Meanwhile, the prolonged uncertainty and political instability have resulted in the loss of foreign investors. The prolonged political tussle between the PTI and PDM has resulted in heavy blows to the economy. In a study by the Karachi-based topline securities brokerage house, the investments had declined from $6.7 to $ 1.4 billion in a couple of years, creating a huge burden on the economy.
Incompetency, weak policies, governance failures, institutional involvements, and not letting them work independently have put a profound mark on the economy of Pakistan. Therefore, we ended up borrowing from external lenders to pay for our burgeoning expenditure. Later, with no exports and economic surplus, we ended up taking loans from other actors to give them to the former. Hence, this perpetual cycle has continued, ending in current account deficits. The debt on numerous public sector enterprises has soared to an astronomical level. Whereas in Afghanistan, the debts on it are low. As the whole structure was functioning on US and UN funds, no debt was in these sectors.Due to this reason, the sum which they receive is spent on the social and developmental sectors.
With a centralized system with no bureaucracy in Afghanistan, the business community is working efficiently and effectively. It is only answerable to the Taliban regime. Businesses and ventures are giving taxes to the Taliban in return for their support and protection. On the other hand, in Pakistan, business activities are constantly barred by political instability, bureaucracy, judiciary and rampant corruption. Consequently, it has never left the economy to flourish in this neoliberal system.
Muhammad Imad Abbas is Studying BS IR NUML , Islamabad