EDITORIAL: There was too much chaos in multiple forex markets in the last few days and weeks. It all started with the two IMF (International Monetary Fund) conditions – one, to do away with administrative restrictions on import; and the other, to ensure that the gap between interbank and open market is no more than 1.25 percent for five consecutive trading days.
With the lifting of imports restrictions, the rate in interbank started depreciating slowly, and expectations of further slippage gained credence.
Seeing this, the demand in the open market picked up and the PKR began to slide almost as if it had become unhinged. And then, there are different hues of open market. The shadier the market, higher is the volatility.
The formal open market started chasing the grey market rate, and due to the IMF condition, interbank had to chase the open market. It had become obvious that the grey market had in fact become the market maker in the forex business.
A marked negativity in business sentiment due to uncertainty on the political front and growing protests against rising inflation and electricity tariffs added fuel to the fire, and the demand for dollars in the open market started skyrocketing.
The Hundi/Hawala business was thriving. Smugglers/importers using SBP’s deferred payment facility started to build up inventories, and people began hedging their wealth to convert PKR to other currencies and attempting to exit Pakistan.
All this resulted in a growing demand for foreign currency in the grey market. That has a direct negative impact on formal sector’s exports and workers’ remittances. People started using informal channels for foreign remittances in much greater number than before, exporters (if they could) started under-invoicing exports to keep a chunk outside Pakistan.
The net impact was that supply of dollars was diminishing in interbank market while demand jacking up in the open grey market. Seeing this, last week, the authorities woke up and started working on building confidence of the business community as well as started a crackdown on black marketeers and smugglers.
Army Chief Gen Asim Munir met dozens of businessmen in Lahore and Karachi, and then there were follow-up meetings as well. He talked about the upcoming investment by GCC countries in the next few years under SIFC (Special Investment Facilitation Council) and invited the private sector to take benefit from this newly-created entity, as well. Then he assured businesses about ending smuggling through Iran and Afghanistan borders and cracking down on grey market currency sellers.
These measures appear to have begun yielding results in the immediate term. The PKR/USD value has started to converge in the interbank and open market, while last week there was a gap of around Rs30 or 10 percent.
The hundi/hawala players have gone underground. And the open market players have started selling decent chunks in the interbank market. The exporters have also started to come for discounting in the interbank and remitters have started reappearing in the interbank market. However, it is too early to say that it is a job well done.
The nervousness in trade and industry has eased, albeit temporarily. However, this is not the first time such threats of crackdown and hope of investment are given by authorities. And every time, the sentiments reversed in a few weeks or months. In order for the sentiments to improve and sustain, actions beyond ‘administrative measures alone’ are warranted.
Smuggling must be stopped. Those who control borders need to show resolve and align themselves with the Army Chief’s sentiments. Over- and under-invoicing should be checked. These days, a case of over-invoicing in imports of solar panels is in the news. Such things should stop and for this stern action should not only be taken but the people must be made aware of it to drive the message home that the government means what it says.
Exchange companies should be more rigorously regulated or monitored. A beginning seems to be in the making in this regard. The State Bank of Pakistan (SBP) is already on it and has asked ‘B category’ exchange companies to merge in ‘A category’ entities or upgrade themselves in three months.
The companies in ‘A category’ have been asked to raise their paid-up capital from the present PKR 200 million to 500 million and, commercial banks are asked to establish fully-owned exchange companies as their subsidiaries as well.
These steps are spot on as most of the black/grey market operates through the “B category” companies. However, without curbing smuggling and hoarders (and hedgers), the grey market will simply move underground and will operate from residences unless economic decisions are taken in order to erode the high profit margins associated with smuggling that make it possible for smugglers to bear the cost of such activity.
Thus, it’s important to address the core issue of worsening balance of payments and consistently high fiscal deficit. Bring the fiscal house in order and show the commitments of investment in SBP reserves. Nothing short of that can sustain an improved sentiment.
Copyright Business Recorder, 2023
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