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Photo Source: Dawn

Pakistan Reader# 491, 28 December 2022

US Dollar flies unabatedly onto Afghanistan



Kabul drains Pakistan of US dollars

Bhoomika Sesharaj

On 27 December, the Exchange Companies Association of Pakistan (ECAP) said that Pakistan has been at the forefront of a wide-scale outflow of US dollars to Afghanistan since the Taliban’s takeover of Kabul in 2021. ECAP’s Chairman Malik Bostan remarked that the exchange of dollars at such an increasing rate has “eroded” Pakistan’s foreign exchange reserves and that the exchange rate has been “destroyed” because of negligence, fake importing, and smuggling of dollars from the country. This comes as Bostan pointed out that the currency exchange between the US and Pakistan stood at PKR 155 rupees and amounted to nearly USD 22 billion when the Taliban took over Kabul, but currently stands at its lowest, with one US dollar selling for PKR 225 in the inter-bank market.

Bostan called the flow of American currency towards Afghanistan a “crisis” for Pakistan and said that about USD 15 million crosses to Afghanistan with Pakistanis taking USD 1000 dollars per day, and 15,000 people frequently visiting Afghanistan every day. Bostan reiterated that the Taliban regime wanted all Pakistani currency to be converted into dollars or other foreign currencies and warned its citizens to hold not more than PKR 0.5m in Kabul. He said that the government would be inspected under “anti-money laundering” laws and warned the Pakistan government to limit the siphoning of dollars from the markets. 

Three reasons why Afghanistan drains Pakistan of its US dollars: 
1. The prevalence of Pakistan’s black market
On 10 December, Finance Minister Ishaq Dar presided over a meeting that put forward the economic challenges that the country is facing because of aggravated smuggling and rising imports of wheat and urea at huge subsidies to Afghanistan, including the smuggling of US dollars through orange crates. The Finance Ministry was informed of the rise in smuggling and trade activities between Afghanistan and Pakistan near the borders and said that it was “humanely” difficult to monitor the border but they would not “allow” it to aggravate further. This comes as Pakistan’s economy is suffering irreparable damage from the Afghan transit trade (ATT) and the lack of clarity of the Pakistani government to enforce a legal mechanism to curb the transit. On 12 December, the Federal Investigation Agency sealed four plazas in Peshawar for running illegal currency businesses and is one of the 257 raids that the police have carried out since 1 January, barring people involved in “Hundi Hawala.” Pakistan’s proposition to collect duties and taxes at the Karachi port lies stale as the Afghan side is unwilling to compromise on its trade decisions. The meeting on 10 December also entailed Dar’s idea to guard the country’s borders and international airports against becoming “dens of smuggling” and to review the ill-working of the law enforcement agencies (LEAs) in the country and the role of these agencies to “strengthen the anti-smuggling regime.”

2. The impeding humanitarian and economic crises in Afghanistan
In September, the  World Food Programme said that people in Afghanistan are facing catastrophic levels of hunger and called for urgent humanitarian action. Since the takeover of the Taliban, international grants which financed three fourth of public spending were severed and also froze forex reserves and assets of the country which has led to an undermined confidence in the domestic currency. IMF has suspended its ongoing programmes with Afghanistan and has issued special drawing rights, which prohibit finance from the IMF. The Taliban has banned any transaction in foreign currency as an ad hoc measure to stabilise the confidence in domestic currency and has enabled other informal channels for flowing of Dollars through Pakistan.

3. The informal nature of transactional access between Pakistan and Afghanistan
Pakistan and Afghanistan have a huge informal network of trade and transactions and have become the preferential trade route to finance imports and conduct large transactions because of the dissipating economic health of the country. Boston’s remarks laid that Pakistan’s domestic market is “full of buyers with not nearly enough foreign currency to meet demand,” and that the informal networks between the two sides have led to an ingenuine market mechanism in the country. Bostan said that the ECAP is “left with nothing to trade,” and that the “Hawalas” and “Hundis” of remitting money “do not involve the banking channel.” Pakistan’s foreign exchange reserves amid the US dollar flow out will drastically decrease due to the impending issues that plague the country’s trading and transaction activities and would need a stronger mechanism to unfurl the damage that has already been done. 

References:
Shahid Iqbal, “Dollar flight to Kabul continues unabated,” Dawn, 27 December 2022
Khaleeq Kiani, “‘Stop dollar, wheat, urea smuggling to Kabul’,” Dawn, 10 December 2022
Bilal Hussain, “Bostan says Pakistan hemorrhaging dollars owing to smuggling and trade with Afghanistan,” The Business Recorder,  26 December 2022
Four plazas dealing in currency sealed in Peshawar,” Dawn, 1 December 2022

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