High inflation in Pakistan is significantly impacting both the economy and its citizens. This persistent inflation is eroding people’s purchasing power, making it increasingly challenging for them to afford essential goods and services. Furthermore, it’s putting immense strain on businesses, which are grappling with elevated operating costs and dwindling demand. The soaring prices of necessities are directly contributing to a decline in people’s purchasing power, exacerbating poverty levels and food insecurity. As prices rise, individuals find themselves burdened with mounting debts, fostering widespread financial stress and anxiety within society. Additionally, the relentless increase in prices threatens to constrain employment opportunities. Businesses, in particular, are bearing the brunt of these circumstances. Elevated operational costs can force them to make tough decisions such as downsizing or restraining new hires. This, in turn, compounds the challenges for job seekers and families seeking to support themselves. The pervasive nature of high inflation underscores the urgency of addressing this issue to alleviate the hardships faced by both individuals and enterprises in Pakistan. Since March 2022, the Pakistani rupee has experienced a substantial depreciation against the US dollar which has appreciated by 100% from Rs. 170 to Rs. 340 before gradually stabilizing at the current rate of Rs. 290, though still notably higher. This dramatic fluctuation in the exchange rate has triggered several distortions in the economy with far-reaching consequences. Investments in climate resilience and social safety nets are imperative to shield the economy from future shocks and protect the vulnerable from economic hardships. First and foremost, the soaring value of the US dollar amplifies the cost of importing goods and services denominated in US dollars. This, in turn, results in higher prices for imported products, which can significantly contribute to inflationary pressures. Additionally, the appreciating dollar makes Pakistani exports more expensive for foreign buyers, potentially diminishing demand for Pakistani goods in international markets. This poses a direct threat to Pakistan’s export-oriented industries. Furthermore, the escalating cost of imports due to the stronger dollar contributes to overall inflation, eroding the purchasing power of consumers and consequently lowering their standard of living. The situation is exacerbated for essential commodities that heavily rely on imports, such as oil and certain food items, as their prices increase, placing additional financial strain on households. The substantial appreciation of the US dollar also has adverse effects on Pakistan’s trade balance. As exports become less competitive and imports become more costly, the country is prone to experiencing a larger trade deficit. Lastly, foreign investors may adopt a cautious stance towards investing in Pakistan due to concerns surrounding exchange rate volatility and the economic repercussions of a rapidly appreciating dollar. This heightened uncertainty could potentially result in reduced foreign direct investment (FDI) inflows into the country, affecting economic growth and stability. Addressing these exchange rate challenges is crucial to mitigate the adverse impacts on Pakistan’s economy and ensure a more stable and conducive environment for trade and investment. The swift and stringent crackdown on Hundi, Hawala, and illegal currency exchange operations, along with border closures with Afghanistan, has indeed had a positive impact on the Pakistani rupee’s exchange rate in a remarkably short span. This has provided a degree of stability and relief to an economy that has been grappling with challenges. However, it’s essential to recognize that this represents a temporary solution, and sustainable remedies are required, both at the macro and micro levels, to establish lasting stability, consistency, and predictability in the exchange rate – a fundamental requirement for a healthy economy. While government regulators and the State Bank of Pakistan may have limited options, the State Bank must adopt innovative monetary policies to manage inflation and stabilize the exchange rate, even within these constraints. Simultaneously, the government should explore measures to support export-oriented industries and proactively manage the fiscal deficit to mitigate the impact of a stronger dollar on the economy. Additionally, the central bank may need to intervene in the foreign exchange market to maintain currency stability and prevent excessive volatility while keeping in view factors such as market sentiment, economic conditions, and geopolitical events. In this context, the latest Asian Development report on Pakistan’s economy presents a sobering picture. It predicts a 0.3 percent slowdown in the economy for fiscal year 2023, in contrast to the 6.0 percent growth observed in FY2022. This decline is attributed to a combination of factors, including devastating floods, policy tightening, and substantial efforts to address significant fiscal and external imbalances. The report observed that the floods have resulted in an estimated $30 billion in damages to infrastructure and crops and have displaced millions of people. The ADB report projects that Pakistan’s economic growth is expected to rebound to 1.9% in FY2024, contingent upon the government’s ability to restore macroeconomic stability and implement crucial reforms. The report acknowledges that the government’s efforts in post-flood reconstruction will contribute to economic growth in the upcoming years. Nevertheless, the ADB report emphasizes significant risks to this outlook, including the potential for additional flooding, a global economic slowdown, and an increase in global interest rates. It also underscores the ongoing risks posed by the war in Ukraine and the persistent COVID-19 pandemic, which could negatively affect Pakistan’s economy. In this backdrop, reforms aimed at enhancing economic efficiency and promoting private sector investment are essential. These reforms should target sectors such as energy, taxation, and labour markets to foster growth. Given Pakistan’s vulnerability to climate change, investments in climate resilience and social safety nets are imperative to shield the economy from future shocks and protect the vulnerable from economic hardships. Innovative solutions involving high-end technology and artificial intelligence can transform the tax system, making it more progressive and alleviating the burden on low-income households, thereby reducing poverty and inequality. Efficiency improvements in the energy sector are also paramount, as it currently faces issues like inefficiency, theft, and mismanagement, contributing to high energy prices. Enhancing energy sector efficiency can bolster competitiveness. Fostering a favourable investment climate by reducing bureaucracy and corruption and improving infrastructure can stimulate private-sector investment, which is a crucial driver of economic growth. Investing in human capital through improvements in education and healthcare is essential to cultivate a skilled and productive workforce, thereby boosting economic growth and reducing poverty. Lastly, targeted support for the poor and vulnerable, such as food subsidies and cash transfers, can help them cope with the challenges posed by high prices. While the crackdowns on illegal currency hoarders provide immediate relief, it’s imperative to implement long-term solutions to mitigate the incentives for such illicit activities. One enduring solution is the establishment and enforcement of robust Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations. Many countries have stringent AML and KYC regulations in place to meticulously monitor and control currency transactions. These regulations make it arduous for individuals and entities to hoard or transfer large sums of foreign currency without proper documentation. Governments and financial authorities can bolster their efforts by employing advanced financial surveillance systems to detect unusual or suspicious transactions, which may include large-scale currency hoarding or smuggling. While cracking down on illegal currency activities provides immediate relief, the long-term goal should focus on reducing the incentives for smuggling and hoarding. This requires the implementation of creative monetary and fiscal policies, updated foreign currency rules and regulations, and the effective use of technology for monitoring and enforcement. Without addressing the root causes and incentives, unscrupulous elements may continue to find new ways to engage in such activities, potentially corrupting regulators and law enforcement personnel along the way. Pakistan faces a complex economic landscape, and addressing these challenges will require a multifaceted approach that includes monetary policy innovation, support for key industries, fiscal responsibility, and structural economic reforms aimed at improving competitiveness, reducing reliance on imports, and attracting foreign investment. These efforts are vital to ensure a more stable and resilient economic future for the country. The writer is a former press secretary to the President and former press minister to the Embassy of Pakistan to France.