The currency touched its lowest value yesterday. PKR/USD closed at 299 and is all set to cross the psychological barrier of 300 today. The banking treasury folks are saying that it is imports and payment demand that is pushing the rate up. However, that import demand factor cannot explain the plight in the open market which closed at 314 yesterday – sliding at a faster pace. And to keep the IMF condition of maintaining a 1.25 percent gap between the interbank and open market, the interbank market is catching up.

Some say that the SBP is behind the curve in the monetary policy which is pushing the currency down. Well, there are no doubts that SBP is behind the curve and has failed to manage inflationary expectations. But rising interest rates (by a token amount) might not be enough to end the growing dollarization.

Pakistan is thoroughly entrenched in a hyperinflation regime, and different policies are needed to get us out of it. Only monetary policy tightening is not going to cut the bill. People are not interested in holding PKR at any rate. And then the informal economy (which is growing) is insensitive to the interest rates. With currency falling every day, it’s creating a self-feeding bubble- as people perceive it’s unidirectional. This further fuels demand while the supply shrinks.

All people know is that there are no known inflows in the near term. The next IMF tranche is due in December and barring that nothing is known to flow in. However, the repayments have piled up. This, along with the growing current account deficit is fueling the speculative demand, as the expectation of further currency depreciation is mounting.

The current situation can get very ugly. The economy cannot be fixed in isolation. The more the political instability grows, the higher the speculation. Against the backdrop of recent chaos, the confidence is eroded further.

People who matter (with money) are finding the exit door. They think that the economy is not going to stabilize (or the PKR is not going to stabilize), and they are looking to dollarize. And that is creating another wave of inflation, which is to be followed by another wave of depreciation. It’s a vicious cycle.

Everything that has to pass, will come to pass before an equilibrium is achieved. Pakistan’s economic equilibrium will be achieved when the economy has slowed down sufficiently. The depreciating currency is adding a natural barrier to growth. The only solution to avoid this is to get $10-15 billion in no time. Or substitute imports with exports (easier said than done). Nothing else will work. Period.