Despite the success of the Roshan Digital Account, record inflow of remittances throughout the last fiscal, as well as a very healthy bulge in foreign portfolio investment (FPI) that came to our capital markets, and the fact that forex reserves are at a five-year high, the Pakistani rupee continues to lose ground against the dollar; leaving analysts and pundits scratching their heads. One immediate explanation is that the increased demand for imported machinery, triggered by an expanding industry on the back of the central bank’s Temporary Economic Refinance Facility (TERF), has pushed up the demand and therefore the price of the dollar.Be that as it may, and industry is indeed expanding very fast in response to all the stimulus measures that came with the lockdowns, but many such initiatives have been in place since at least mid-2020 and the rupee strengthened for at least the next 9-10 months; a fact that the ruling party celebrated as proof, for some reason, of the economy turning around. So incentives sprinkled on industry have played a role, and it will translate into current account deficit problems soon enough, but that is not the only reason for the Pakistani rupee suddenly abandoning its upward trajectory and taking a plunge. Besides, the prime minister claims that previously money was being easily laundered at the will of past rulers and his government put restrictions on all such flow of money out of the country. But the fact remains that when it was easy to get money out the rupee was at around 110 to the dollar, and when all the controls have been put in place it is flirting with the 160 level. This is not easily understandable and needs more than an academic explanation. A bigger reason for this behaviour might be what is known in the currency market as the carry trade, where investors buy high-interest rate currencies against low-interest rate ones and eat off the percentage difference. And Pakistan’s interest rate, still on the high side considering the global average over the last year or so, has attracted carry traders like bees to honey. Such arbitrageurs don’t make profits unless they are leveraged to the hilt, so whenever the interest rate regime changes or unforeseen events force monetary authorities to toggle the money supply, then the whole things falls apart like a house of cards. The Pakistani rupee’s close friend, the Turkish lira, had a very traumatic experience just last decade because of just such policies.And it seems things will get worse before they get any better. Rising inflation means the state bank will have to raise rates even further at some time in the ongoing fiscal, which can even make expanding business contract quite suddenly. Already the SBP is clearly intervening at the 160 resistance point against the dollar, after making such a big deal about never having to fiddle with the market again, so this is one bull that it will have to take by the horns if it wants to solve this problem without too much financial trauma. Otherwise the ordinary public as well as the business community will bear the brunt of the rupee’s fall from grace. *