At this point, the Iranian nuclear deal has proved to be bad news for Pakistan, for it has sent the dollar higher, thus creating a pressure on the rupee, just at a time when the government must purchase foreign exchange to make principal and interest payments to lenders. It was thus not surprising that the rupee breached the 109-to-the-dollar barrier on Monday, when trading resumed after a weekend break. While the rupee fell 30 paisas to Rs 109.10 for buying in the open market, it also made it to Rs 108.20 after a 50-paisa fall on the interbank market.

Although it seems too early to declare that a panic has set in, the situation seems dangerous, and the government must not forget its huge foreign debt, and just how much is added to the debt burden by even a minor fall in the rupee, let alone such a precipitous fall as on Monday. As the debt is denominated in dollars, IMF Special Drawing Rights or the lending country’s own currency, repayments are to be made in dollars bought by the government either from the State Bank Of Pakistan, or the other commercial banks operating on the interbank market. Thus the question of whether the dollar is appreciating or depreciating against the rupee is not merely a concern of those (mostly exporters) who hold dollars, but of every Pakistani taxpayer, because the government buys the dollars with rupees collected from them.

There has already been one episode of selling the rupee short, a situation which was partially remedied by the State Bank giving the commercial banks a good talking-to. However, the real solution lies in the government controlling its appetite for free money. At this point, doing a deal with the IMF does not seem to have solved the problem, even though its previous package has caused the current problem. The huge repayments due to it are actually what are forcing the rupee down as the government scrambles to buy dollars from wherever it can get them.

Though the only real solution is for the country to develop deeper reserves by exporting more, the government must be cautious that there is not a fresh panic on the currency market, because its own buying of dollars sets it off. It must not be forgotten that when the rupee loses value in such a panic, the loss is permanent. That means that the Pakistani consumer, already hard-pressed by taxation, also faces more expensive fuel, food and medicines, as well as other exports.