The role of geopolitics in repeated foreign exchange crisis in Pakistan

• Geopolitical crisis gripped the Afghanistan and Pakistan region for long time • Regional geopolitics and informal activities badly affected Pakistan financial sector • Taliban control of Afghanistan has increased the probability of FX crisis in Pakistan • Policy makers in Pakistan needs to understand the new dimension of FX crisis. This study investigates the impact of recent regime change in Afghanistan on FX market crisis in Pakistan by using logistic model and monthly data from January 2016 to June 2023. The findings of the study show that the fall of Kabul to Taliban in 2021 has significantly contributed to 2022-2023 FX crisis in Pakistan. Greenback disappeared from regulatory domain in Pakistan and become available only in ‘Grey Market’ at a very high premium after the rise of informal and illegal trade across Pak-Afghan border under the new Afghan regime. The finding of this study is robust.