Parallel Forex in Pakistan: Understanding the Hidden Market

 Parallel Forex in Pakistan: Understanding the Hidden Market

In the hidden markets of Torkham, dollar bills move faster than fresh No receipts, no bank slips, no official record, just the hum of a trade that silently drains Pakistan’s foreign exchange reserves.

What Is Parallel Forex?

In many struggling economies, money doesn’t just move through banks or licensed exchanges. It moves through unmonitored, informal markets that sit outside the regulated financial system. This is parallel forex trade,  a network where dollars are sold at a rate far removed from the one fixed by the central bank.

The market exists because of scarcity. Restrictive monetary policies, shortages of foreign currency, and relentless demand for imports push people away from formal channels. The result is a shadow system that is not only illegal but deeply entrenched in Pakistan’s economic life.

 

Why It Thrives in Pakistan

Parallel forex is not new here. For decades, it has surged whenever the rupee came under pressure. Chronic trade deficits, fuel imports, and shrinking reserves have left the currency vulnerable. To stem the bleeding, governments fixed exchange rates, slapped on import restrictions, and demanded heavy documentation for every dollar purchased.

Instead of solving the problem, these measures widened the gap. Banks ran dry of dollars. Businesses turned to the streets, where cash was available, at a premium. And the underground market grew.

 

How Hundi and Hawala Work

Behind the scenes, the system is powered by hundi and hawala, informal remittance networks spanning continents. The mechanics are deceptively simple: a customer hands over rupees in Karachi, and within hours a counterpart in Dubai releases dollars.

It is seamless, fast, and entirely outside the banking system. Similar networks thrive in Nigeria, Sudan, and Afghanistan under currency stress, proving Pakistan’s struggle is part of a wider global pattern.

More Than Just Better Rates

The appeal runs deeper than a few extra rupees on the exchange. Formal banks require documents, tax details, and declarations of source of income. Hawala asks for nothing.

For a migrant worker in Dubai, the choice is stark: send $1,000 through the bank and his family receives ₨275,000; send it through hawala and they receive ₨290,000. That ₨15,000 gap, multiplied across billions in remittances, builds an enormous shadow pool of dollars outside official reserves.

The same opacity also makes hawala irresistible to tax evaders, smugglers, and politicians moving undeclared wealth abroad. Importers understate invoices to pay less duty, then settle the balance through hawala. For a practical look at how recent tax rules affect cross-border currency flows, read my explainer on FBR Tax Return Updates for FY2024–25. Exporters overstate invoices to sneak in extra dollars. Black money generated in one corner of the economy is laundered clean in another.

 

The Untouchables

The biggest open secret? Dealers rarely work alone. Many operate under the umbrella of powerful political and business patrons. Raids are staged, headlines are written, but the market resets the very next morning. From small shopkeepers to elite traders, everyone knows who the “untouchables” are.

 

The Cost to the Nation

Every dollar that flows through hawala is a dollar denied to the State Bank. Reserves shrink. The rupee weakens. The government borrows more to plug the gap. Dealers engineer artificial shortages that ripple into higher fuel, medicine, and food prices.

The burden eventually falls on the ordinary family, paying the hidden tax of an underground market they never chose. The IMF estimates Pakistan loses billions annually to these informal forex flows a leak that deepens an already fragile economy.

 

A System Too Fast to Catch

Despite repeated crackdowns, the parallel market endures. Transactions are discreet, cash-based, and nearly impossible to trace. Dealers adapt faster than regulators can respond.

At its core, the endurance of this trade is not about policing small operators. It is about the structural flaws that fuel demand: currency shortages, artificial exchange rates, and deep mistrust of official institutions. Unless policy catches up with market reality, the shadow system will always outpace the law.

 

FATF and the Futile Crackdowns

Under pressure from the Financial Action Task Force (FATF), Pakistan has tightened rules, televised raids, and introduced fintech solutions. Banks face stricter documentation requirements. Dealers are arrested for the cameras.

Yet networks adapt. Phones are switched, codes are changed, and the money flows again. The uncomfortable truth is this: dismantling hawala is not about arresting street dealers. It is about dismantling the protection rackets and fixing the very demand that fuels them.

 

The Unfinished Battle

Until the formal system becomes as fast, as rewarding, and as trustworthy as the shadow one, the parallel forex market will never die. To understand Pakistan’s situation in a broader context, see my coverage of the World Bank’s 7th Public Finance Conference 2025.

For Pakistanis who rely on it daily, workers, traders, and businessmen, it is more than an underground economy. For many, it is the real economy.