Pakistan, Aug. 1 -- The rupee is not only a means of transaction but also reflects the country's economic discipline, political trustworthiness, and structural strength. However, for many years, Pakistan's exchange rate has fluctuated between manipulation and fear, controlled behind the scenes and often misinterpreted in public discussions. As of mid-2025, with the currency valued at approximately Rs 283 per US dollar, the discussion once again focuses on whether the rupee is being artificially kept low, unnecessarily allowed to float, or in line with real economic factors.
Remove the distractions, and a more accurate image becomes clear: Pakistan's rupee is not experiencing a sharp decline, nor is it moving without direction. Various indicators now show that it is undervalued—slightly, yet significantly. When we consider key measures such as the Real Effective Exchange Rate (REER), Purchasing Power Parity (PPP), current account balance, institutional reports, and market expectations, the outcome is undeniable. The fair value of the rupee as of mid-2025 is roughly Rs?250 per US dollar, with a reasonable range from Rs?240 to Rs?260. Therefore, the actual rate surpassing Rs?280 indicates caution rather than disorder.
Starting with what the REER indicates – the rupee's value relative to a trade-weighted group of currencies, taking inflation into account. The REER is currently approximately 96.6, just below the 100 level that economists consider a neutral standard. In simpler terms, this suggests that the rupee is somewhat cheaper compared to its 2010 value in real terms – a slight undervaluation that benefits exports while making imports more costly. For a nation like Pakistan, which aims to develop local industries and reduce excessive imports, this position is advantageous. It is a calculated approach, not a coincidence. Nevertheless, the REER does not account for capital movements or structural constraints, and its effectiveness as the only indicator is limited when speculative behavior is dominant.
Next is the purchasing power perspective. The Big Mac Index, traditionally used as a simple measure of PPP, indicates that the rupee is more than 30% undervalued relative to the US dollar. This suggests that the rupee has significantly higher domestic buying power than its international trading value. Even when considering income variations and regional economic differences, the rupee remains undervalued by approximately 20%, with estimated fair-value exchange rates ranging from Rs 230 to Rs 250. These basic indicators are not definitive, but they highlight a key idea: the rupee's weakness is not solely due to inflation or productivity - it is also influenced by investor sentiment, policy inaction, and confidence shocks.
What do institutions have to say? The International Monetary Fund (IMF) has not set a specific figure but has highlighted the significance of a rate determined by the market. Recent assessments by the Fund indicate more attention to fiscal reform and the restructuring of state-owned enterprises than to fluctuations in the rupee. Their primary worry has been overvaluation in the past—particularly in 2017-2018, when a rigidly fixed rupee (approximately Rs 105) caused a growing current account deficit and ultimately a collapse. This difficult experience showed policymakers that manipulating the currency when underlying fundamentals are unbalanced leads to expensive adjustments. Similarly, the State Bank of Pakistan (SBP) has also avoided setting specific targets but clearly favors a Real Effective Exchange Rate just below 100, suggesting that a slightly undervalued rupee is part of its long-term strategy for competitiveness.
However, private-sector economists are more outspoken. Tola Associates suggests the rupee's fair value is approximately Rs 249, considering current account trends and monetary forecasts. Bloomberg Economics estimates it at Rs 244, while Goldman Sachs, using its own fundamental equilibrium models, believes the rupee is roughly 20% undervalued, indicating a reasonable rate of around Rs 230-240. Given that the current account is nearly balanced, inflation is within the 8-9% range, and foreign reserves have exceeded $14 billion, the fundamentals do not justify a Rs 283-dollar exchange rate, especially under conditions of policy consistency and macroeconomic responsibility.
Why does the rupee continue to be weaker than its true value? One explanation is caution. The State Bank of Pakistan has intentionally accumulated reserves by purchasing dollars when the rupee strengthened, thereby reducing its appreciation. This "leaning against the wind" strategy prevents excessive correction into a new overvaluation. The SBP has drawn lessons from history—rapid rupee appreciation, if followed by policy changes or external shocks, can harm credibility. By maintaining a "managed float" with targeted interventions, the SBP ensures both a competitive edge and foreign exchange reserves. However, it must ensure that this control does not turn into manipulation, which could lead to investor skepticism and attention from the FATF.
Another crucial element is market sentiment. Following years of continuous devaluations, failure to meet IMF goals, and political uncertainty, the rupee continues to face a risk premium. Both domestic and international investors incorporate this into their valuation models. As long as foreign direct investment does not increase substantially, governance does not improve, and long-term trust is not restored, this perception-based undervaluation could remain. In many respects, the rupee today is more a result of reputational harm than structural decline.
Nevertheless, a government-driven undervaluation also presents significant dangers. Although it may boost exports in theory, Pakistan's export sector is limited and heavily dependent on textiles and rice. A currency that is excessively weak, without corresponding improvements in productivity, only fuels inflation and increases the pressure of foreign debt. A single rupee decline against the dollar increases the cost of servicing debt by billions. Moreover, the general public continues to face the consequences of imported inflation—especially in food, fuel, and medicines. Permitting the rupee to slightly strengthen towards its true value can help reduce domestic inflation without harming external competitiveness, particularly as the balance of payments situation is becoming more stable and reserves are improving.
A stronger rupee enhances the buying capacity of individuals. Although economists might view depreciation as a method to limit imports or stimulate exports, common people perceive it as a setback for their finances. Education, healthcare, transportation, and food—most of which are imported or connected to imports—become costlier with each decline in the rupee's value. A currency that stays undervalued for an extended period adversely affects the poorest the most, particularly in a society where consumption plays a major role, such as Pakistan.
Looking forward, the way is more defined than it has been in recent years. If Pakistan maintains its current course aligned with the IMF, avoids significant political disruptions, and manages inflation and the current account effectively, the rupee does not have any fundamental reasons to decline further. Indeed, unless there are external crises or abrupt policy changes, we anticipate the PKR/USD exchange rate to stay relatively stable or slowly improve, reaching around the Rs260s by mid-2026 — a trend that corresponds with an improving economy, better fiscal management, and the return of market stability.
What is crucial at this moment is communication and trust. It's time for Pakistan's decision-makers to position the discussion on the exchange rate within the framework of reform, rather than opposition. They need to overcome the lure of populist measures that aim for rapid appreciation for show, as well as the tendency of officials to maintain an artificially low rupee. A hasty adjustment to meet public opinion will be equally harmful as preventing natural appreciation due to outdated protectionist approaches. Let the rupee demonstrate Pakistan's advancements, not its fears.
Enabling it to approach fair value sends a clear message - to investors, trading partners, and the public - that Pakistan is not interfering with its currency but allowing it to determine its own value through prudent management. If the exchange rate represents economic reality rather than political fabrication, it enhances long-term trust in financial markets and opens the door to more affordable international funding.
There is honor in a market-driven rate — provided it is achieved through consistency. At Rs 250, the rupee shows a recovering economy, a more stable macroeconomic climate, and a government that is finally managing its finances. This is the figure we feel represents the truth — not just numbers, but also hope. It's time the rupee receives the recognition it deserves — not for what it was, but for what it can become.