EDITORIAL: The gap between the currency markets — the interbank and the open market — is widening on a daily basis.
The lower value of PKR against USD in the open market is pushing the PKR to depreciate in the interbank market as well. A lot of theories have emerged about the reasons for higher depreciation in the open market.
The fact of the matter is no one knows what is happening. Everyone is shooting in the dark. And that is the scary part of the story. This type of episode happened a few weeks ago. At that time, the premise was that the confidence will restore once the International Monetary Fund (IMF) programme is back on track.
That the IMF tranche is in the SBP (State Bank of Pakistan) account and the financing requirement for the rest of the current fiscal year is more than covered is a fact. The question that begs a plausible answer is why the currency is still falling ignominiously in the open market.
There are three markets for currency in Pakistan — formal and informal open markets, and interbank market. Lately, the supply is available only in the informal market but at a steeper premium. Unfortunately, this all is happening under the central bank’s nose.
The question is: what is the central bank doing to address it? Why is it not taking any punitive action against the exchange companies or individuals involved in hoarding or other similar malpractices? What is the SBP doing to increase the inward flows? Someone must respond to these legitimate questions or concerns.
Clearly, the SBP communication (provision of information to financial markets and the public on policy issues) needs to step up. There should be a clear guideline on it. The grapevine suggests that no one knows why the supply to the open market has shrunk.
Exchange companies’ usual annual inflows are of around $2 billion in remittances, which they have to surrender to the interbank, and over $4 billion inward flows that travellers and others coming to Pakistan bring.
Is the Civil Aviation Authority’s requirement of declaration at airports to be filed by all international passengers coming to and moving out of Pakistan creating an impediment to these inflows? There is nobody from either the finance ministry or the central bank to address these questions. However, some new demand is being generated, which is drying the daily net inflow from exchange companies to the interbank market.
One more question that needs a cogent answer is whether with travel opening, the demand of foreign currency has soared. According to exchange companies, one of the reasons behind rising demand is a new UAE rule that requires all passengers to hold valid return tickets with visa and 5,000 dirhams with them when travelling to the emirates.
The customs here at home is demanding the travellers coming back to Pakistan furnish declaration of foreign currency. Needless to say, this step is adversely affecting the supply.
Meanwhile, the smuggling of food items through Afghanistan and Iran in the midst of the destruction the flash floods have wrought so far is placing added pressure on the currency in the open market.
Some believe that allowance of dollar exports by exchange companies may be doing the damage. However, these exports are under $10 million — an amount of money that is so small it is perhaps not worth considering in view of the overall enormity of the issue.
There has been talk about the impact of administrative measures the SBP has taken with regard to L/C opening. There are certain business firms that are importing stuff on bills of lading but settling import amounts outside Pakistan. Perhaps these payments are routed through purchase of foreign currency in the black market (out of exchange companies’ inflows of $4bn); and it is somehow being smuggled outside Pakistan.
That is also reducing the supply of foreign currency from exchange companies to the interbank. The central bank needs to become proactive both in terms of action on the ground and communication through regular media briefings to effectively deal with the rumours and foul play in the market.
One way or another, market distortions have come to haunt; and these are putting pressure on a beleaguered PKR in the open market that, in turn, is pushing the PKR down in the interbank market. SBP needs to reach out to stakeholders for a broad-based discussion and come up with a way to curb the dangerous divergence.
Needless to say, certain economic fundamentals, too, are playing a role in this regard. The import demand is growing again in the interbank market. And on top of all this is the political uncertainty. ‘How to take the legally earned money out of the country’ is the most frequently asked questions by the business community in informal get-togethers. Unless this sentiment is reversed, the currency and economy will only go south.
Copyright Business Recorder, 2022
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