Pakistan has lost six in every ten rupees to the dollar in seven years. The rupee’s slide is not a mystery — it is the product, and sometimes consequence, of five structural failures. Pakistan Ledger unpacks each one.
The basic reason
A currency falls when the demand for it falls relative to supply — or, more precisely, when a country spends more foreign exchange than it earns. Pakistan consistently earns fewer dollars from exports, tourism, and investment than it needs to pay for imports, debt repayments, and profit repatriation by foreign companies. The gap must be filled somewhere: by borrowing, by drawing down reserves, or by letting the rupee weaken until the arithmetic balances. Pakistan has repeatedly chosen a combination of all three.
The State Bank of Pakistan (SBP) manages the exchange rate but cannot defy gravity indefinitely. When reserves run low and borrowing options tighten, the rupee adjusts — sharply and painfully.
Reason 1 — trade deficit
Pakistan imports far more than it exports. According to SBP data, goods imports reached $4.98 billion in a single month in mid-2025, against exports of just $3.30 billion — a monthly merchandise gap of roughly $1.5 billion. Over the first seven months of fiscal year 2025–26, the merchandise trade deficit widened to $18.4 billion, up from $14.1 billion a year earlier, with the current account deficit totalling $1.07 billion over that period.
The structural problem is stark. Pakistan’s export basket is narrow. Textiles account for roughly half of all merchandise exports, leaving the country exposed to a fraction of what regional rivals manage. Pakistan imports oil, machinery, chemicals, and food — goods for which there is no easy domestic substitute. Every time global commodity prices rise, or the rupee weakens, the import bill grows automatically.
This chronic trade gap is the single largest source of downward pressure on the rupee. It leaves Pakistan perpetually a net seller of its own currency.
Reason 2 — foreign debt
Pakistan’s external debt stood at $138 billion at the end of 2025, according to Trading Economics data sourced from the IMF — up from roughly $44 billion a decade ago. Servicing it — both repaying principal and paying interest — means Pakistan must find foreign currency it does not generate domestically. The annual debt service bill consumes a significant portion of the country’s foreign exchange earnings each year.
Each repayment requires selling rupees to buy dollars, creating additional downward pressure on the currency. When Pakistan struggles to refinance maturing loans — as it did acutely in 2022–23 — the threat of default amplifies the rupee’s decline as investors rush to exit. High external debt also constrains fiscal policy: resources that could fund investment are directed to debt service, perpetuating the low-growth trap that keeps the rupee weak.
Reason 3 — low investment
Foreign direct investment (FDI) brings dollars into an economy and strengthens the currency. Pakistan receives very little of it. FDI stood at just $496 million in the first quarter of FY26 per SBP data — a fraction of what comparable middle-income peers attract. Portfolio investment remained negative over the same period, meaning more capital left Pakistan than entered it.
The reasons are well-documented: regulatory unpredictability, energy shortages, security concerns, and a complex tax environment deter overseas capital. Without a steady inflow of productive investment, Pakistan cannot build the export capacity that would naturally support the rupee. Low investment also means low productivity growth, which keeps Pakistani goods less competitive globally — creating a self-reinforcing cycle of weak exports, weak investment, and a weak currency.
Reason 4 — inflation
When prices rise faster in Pakistan than in its trading partners, Pakistani goods and assets become relatively expensive. Exporters and importers respond by reducing their rupee holdings, which weakens the currency. Pakistan’s inflation reached a peak of 38.5% in May 2023 — among the highest in the world that year. The SBP’s tight monetary policy drove annual inflation down to just 0.3% by April 2025, but the rate has since rebounded to 10.9% as of April 2026, above the SBP’s 5–7% target band.
Persistently high inflation relative to trading partners makes Pakistan’s exports structurally costlier in real terms — eventually forcing a currency correction. And for ordinary Pakistanis, the effect is compounding: a family in Karachi that saw its grocery bill more than double between 2021 and 2023 faces an erosion of purchasing power that does not simply reverse when inflation falls.
Reason 5 — IMF conditions
Pakistan has been on IMF-support programmes continuously since 2019. The current 37-month Extended Fund Facility (EFF), approved in September 2023, carries a commitment of $7 billion and is on track, with gross reserves reaching $16 billion at end-December 2025. But it comes with conditions that directly affect the exchange rate.
The IMF has consistently required Pakistan to maintain a “more flexible exchange rate” — effectively requiring the SBP to allow the market to find its own level rather than using reserves to defend an overvalued peg. The sharp rupee depreciations of the past decade were partly a consequence of correcting managed exchange rates that had masked underlying imbalances for years.
IMF conditions also require fiscal consolidation: higher taxes, reduced subsidies, and higher energy prices — all of which feed through into inflation and add to the cost of living, further weighing on the rupee.
Impact of rupee depreciation — key channels
| Channel | Mechanism | Current impact |
|---|---|---|
| Exporters | Pakistani goods become cheaper for foreign buyers; exporters earn more rupees per dollar | Textile exports rising but narrow base limits upside |
| Importers | Imported goods cost more in rupees; input costs rise for manufacturers | Import bill at record highs, fuelling cost-push inflation |
| Government | External debt servicing more expensive in rupee terms; fiscal pressure rises | Debt service consumes ever-larger share of revenues |
| Overseas Pakistanis | Remittances buy more rupees; incentive to send money home increases | Remittances at a record $38bn in FY25, up 27% year-on-year |
| Savers | Rupee-denominated savings eroded in real terms; dollar savings more attractive | Dollarisation pressure persistent despite recent stabilisation |
Can the rupee recover?
The rupee has stabilised in the 278–279 range — within a 52-week range of 278 to 286 — since the IMF programme took hold. Pakistan recorded a current account surplus of $2.1 billion in FY25, its first surplus in years, supported by historic remittance inflows of $38 billion — up 27% year-on-year. Gross foreign exchange reserves reached $16 billion at end-December 2025. Pakistan is currently in its third year of IMF programme compliance, a rarity in its history.
But the current account has since slipped back into deficit. The merchandise trade deficit has widened to $18.4 billion in the first seven months of FY26, against $14.1 billion a year earlier. External debt remains at $138 billion. Inflation at 10.9% in April 2026 is above the SBP’s target band. Growth is resuming — GDP is forecast to reach 4% in FY26 — but the recovery remains measured, not exuberant.
The takeaway
The rupee falls because Pakistan spends more foreign currency than it earns — importing heavily, servicing large debts, and attracting too little productive investment to offset either. Inflation erodes the currency’s purchasing power from within while external imbalances press it from without.
For Pakistanis, the proximate cause of a weaker rupee is a number on a screen. The real cause is a set of structural policy failures: a narrow export base, a heavy debt burden, a hostile investment climate, and a history of fiscal overreach. The rupee is not simply falling. It is reflecting the economy’s underlying imbalances — and those imbalances are where the serious work must be done.
The path to a stable rupee runs through higher exports, lower debt, and an investment climate that makes Pakistan competitive. These are not secrets. They are the reforms Pakistan has been promising itself, and its creditors, for a very long time.
Pakistan Ledger supports its reporting with primary data. USD/PKR rate and 52-week range: Investing.com. External debt of $138bn: Trading Economics / IMF. Merchandise trade deficit of $18.4bn (Jul–Jan FY26) and current account deficit of $1.07bn: The Express Tribune. FY25 current account surplus of $2.1bn and remittance inflows of $38bn: Dawn. April 2025 inflation of 0.3%: Finance Division. April 2026 inflation of 10.9%: Trading Economics. IMF EFF programme details and gross reserve figures: IMF.
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