PRAC proposes fixed currency peg with scheduled REER, reserve reviews

May 27, 2025 (MLN): The Policy Research & Advisory Council (PRAC) has proposed a policy action to peg the currency at a fixed rate, with scheduled reviews based on the Real Effective Exchange Rate (REER) and reserve adequacy ratios, as outlined in the report titled "Strategic Management of Pakistan’s Forex Reserves: Boosting Exports & Investment Flows."

Additionally, to attract long-term investment, incentives will be offered for 3- and 5-year Naya Pakistan Certificates (NPCs), and Roshan Digital Account (RDA) holders will be allowed to invest in Special Economic Zones (SEZs) and agricultural processing.

To curb hoarding and formalize inflows, the policy outlines the gradual integration of exchange companies into banks and offers open-market-aligned exchange rates or cash incentives for forex deposits and withdrawals.

Dollar deposits held for a year will also be incentivized with tax exemptions, the report added.

Other notable actions include restrictions on leisure travel during periods of low reserves, periodic tourism fees, and mandatory purpose documentation for non-business travel.

The credit card limit will be lowered to $15,000, or users will face a 5–10% penalty on excess spending.

To strengthen the external account, the policy promotes digital transactions by reducing per-transaction and annual fees for businesses, especially in tourism.

It also mandates updates to FBR valuations to curb under-invoicing, avoids ad hoc import bans, and ties import quotas to export performance.

Furthermore, it proposes amendments to the SBP’s export fines policy to incorporate sector-specific exceptions, the report noted.

Forex reserves and external sector

After a turbulent journey—from just $0.2 billion in 1960 to a historic peak of $23.5bn in 2016, and a fall to $11.3bn in 2023—Pakistan’s foreign exchange reserves have remained under persistent pressure.

In response, the government implemented measures, such as banning imports of over 500 items, restricting letters of credit (LCs), and introducing cash margin requirements.

These steps helped curb import growth and conserve crucial foreign exchange reserves.

By FY2024, however, the country’s liquid net reserves had improved to $17.3bn, including $9.5bn held by the State Bank of Pakistan (SBP).

Trade sector

Pakistan's trade dynamics have experienced significant shifts over the years, with a growing disparity between exports and imports.

Various factors, including the limited diversification of exports and an increasing reliance on imports, have fueled this growing imbalance.

Since trade liberalization, exports grew at a compound annual rate of 5.7% from FY 2004 to FY 2024, reaching $31bn, but they remain stagnant with a narrow base.

In contrast, imports expanded at 8.2% CAGR, reaching $53.1bn in FY 2024, outpacing exports.

The controlled trade deficit in FY2022-FY2024 resulted from government-imposed import restrictions amid exchange rate volatility and a near-default crisis, which led to a $17bn drop in imports.

Foreign Direct Investment (FDI)

FDI plays a vital role in economic development by providing capital, technology, and expertise.

In Pakistan, the FDI has remained volatile, peaking at $5.59bn in 2007 before dropping to $1.82bn in 2023.

Surges in 1990-1996 were driven by forex liberalization (allowing up to 100%), withdrawal of restrictions on profit repatriation and currency holdings, while the mid-2000s boom stemmed from privatization and sectoral expansion.

However, political instability and security concerns have led to a sharp decline since then.

Remittances

Workers’ remittances have played a critical role in bolstering Pakistan’s foreign exchange reserves.

From FY 1976 to FY 2006, annual remittance inflows remained below $5bn.

However, during the FY 2007 to FY 2024 period, remittances grew significantly—from $5.5bn to $30.3bn—reflecting the increasing reliance on overseas Pakistani workers.

The majority of these inflows originate from Saudi Arabia (30.94%), the UAE (15.54%), the United States (13.11%), and the United Kingdom (11.82%).

Despite this growth, remittances continue to face challenges due to informal transfer channels such as Hawala and Hundi.

These are largely driven by disparities between official and parallel market exchange rates, with the gap reaching Rs23 in 2023.

External debt

Pakistan’s external debt has been a major factor in the depletion of foreign exchange reserves, rising from $32.2bn in FY2000 to $114.1bn by FY2024, with $59.4bn added over the past decade (FY2013–FY2024).

Foreign commercial banks and multilateral lenders remain primary sources of this debt.

The mounting pressure on reserves is evident, as debt servicing rose from 34.8% of reserves in FY2003 to 59.9% in FY2013, and nearly tripled to 98% by FY2024, underscoring the increasing strain on Pakistan’s financial stability.

Comparative analysis with other countries

Diaspora bonds have emerged as a vital instrument for governments to mobilize financial resources from their overseas communities, especially during crises.

These funds are often directed toward relief efforts and infrastructure development.

A comparative analysis of such overseas bonds reveals notable distinctions.

Pakistan’s Naya Pakistan Certificates (NPCs) and the Philippines' Retail Treasury Bonds (RTBs) are accessible to both resident and non-resident investors.

In contrast, India’s NRI Bonds and Bangladesh’s Wage Earners' Development Bond (WEDB) cater exclusively to non-residents.

Furthermore, while Bangladesh restricts returns on its WEDB to local currency (BDT), Pakistan offers options in foreign currencies.

Despite a series of policy rate cuts, Pakistan’s returns on NPCs remain competitive.

However, India continues to attract more overseas investors, benefiting from its robust local institutional frameworks.

In the domain of skill development, essential for enhancing workforce competitiveness and boosting remittances, Pakistan, India, and Bangladesh present varying outcomes.

Pakistan significantly lags behind, with only 6% participation in Technical and Vocational Education and Training (TVET) and 2.5% engagement in on-the-job training.

A deeper comparison reveals that Pakistan suffers from a TVET-industry mismatch, primarily due to the minimal involvement of the private sector.

This contrasts sharply with India and Bangladesh, where substantial industry participation enhances program outcomes.

Government incentives in India and Bangladesh have played a key role in the success of their TVET initiatives, whereas limited state support in Pakistan discourages private-sector involvement.

Although the Higher Education Commission (HEC) in Pakistan has partnered with Microsoft and Coursera, access to globally recognized certifications remains limited, adversely affecting the international employability of Pakistani workers.

Additionally, while Pakistan's TVET efforts are concentrated in the IT sector, India has diversified into multiple sectors, and Bangladesh strategically aligns its training programs with the demands of the Gulf Cooperation Council (GCC) countries.

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