The Pakistani rupee weakened almost 10 per cent against the US dollar during the past 6 months. The rupee has been under pressure mainly because Pakistan’s oil imports have considerably increased. As international crude oil prices have been continuously going up, the soaring demand for dollars to make import payments has become the main factor impairing the rupee’s value. Pakistan is going through grave economic crisis that requires intelligent, efficient and effective measures. The rupee hit its lowest in the interbank market last month on May 20, 2008. It closed at 69.80 against the US dollar on May 20. State bank of Pakistan quickly intervened but again the rupee fell as low as 69.90 against the dollar in the open market on May 22, 2008. Falling trend in the PKR/USD parity persisted in the first five months of year 2008, until the State Bank of Pakistan took matters in hands. Later the rupee recovered 3% after plunging to its lowest on May 20 in the inter-bank market; but it had already suffered 10% depreciation in its value against the US dollar (approximately 7 Rs per dollar) since January 2008. Besides, the benchmark 100-index at the Karachi Stock Exchange also took a nose dive in the midst of economic crisis and consequently, Pakistani investors started diverting their funds from local stocks to the US dollars. The US dollar had almost vanished from the market. Outward payments were abnormally high, whereas inward receipts became drastically slow. The State Bank of Pakistan revealed that the persistent depreciation of the rupee has increased the public debt by Rs315 billion, i.e. without borrowing as little as a dime. The rupee’s extraordinary depreciation poses serious threat to the Pakistani economy. Moreover, record decline in the foreign exchange reserves due to import payments also put the economy in an alarming situation. Reserves held by the SBP declined by massive $297 million to $8.387 billion in the first week of June 2008. The government must have about $4 billion foreign inflows by end of the fiscal year 2007-08 in order to maintain its foreign exchange reserves. To deal with the whole worrisome economic scenario, the State Bank of Pakistan announced to have a tight fiscal policy last month. The central bank raised the discount rate from 10.5 per cent to 12 per cent on May 23, 2008. Moreover, the Cash Reserve Requirement (CRR) for all deposits up to one year maturity was increased by 1% to 9%. The SBP also increased the Statutory Liquidity Requirement (SLR) by 100 basis points to 19% of the total time and demand liabilities. Later in last week of May, 2008, the central bank also took steps against speculative currency trading by controlling major currency export by money changers. SBP’s intervention to smoothen the money market volatility worked to some extent. The PKR/USD parity improved from 69.80:1 on May 20, to 67.25:1 on Monday, June 23, 2008. As far as the short term forecast for the PKR/USD pair is concerned, Pakistani rupee is expected to stay stable for a while because of foreign inflow from friendly governments. The SBP is expecting foreign currency inflows of approximately $3.5 billion from multilateral lenders and friendly governments in the short to medium term. Rupee is likely to stay stable at this level. With stock market back on the track, and KSE 100-index gaining 900 points in just a day, I think that investors are going to turn back their attentions to the stocks again.