Inter-bank & open markets: exchange rate gap starts to breach IMF-defined limit

The Pakistani rupee saw significant depreciation against the US dollar in the open-market, crossing the 300 level during trading as gap with the inter-bank rate widened yet again.

The rupee was quoted at 299 for selling and 302 for buying purposes for customers in the open-market, in comparison to 293-296 recorded in the previous session.

Official rates released by the Exchange Companies Association of Pakistan (ECAP), however, quoted the rates at 297 and 300 for selling and buying, respectively.

The rupee closed at 291.5 against the US dollar in the inter-bank market.

The difference between inter-bank’s closing and open-market’s selling rates stood at nearly 3% on Tuesday. Similarly, the difference between inter-bank’s closing and open-market’s buying rates also stood at nearly 2%.

In both cases, the limit defined by the International Monetary Fund (IMF) was breached.

“Average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period,” it says in the IMF country report on Pakistan that was published after the lender’s Executive Board approval in July.

An expert warned that the widening gap in currency rates between the inter-bank and open markets is not good omen for the ongoing IMF programme.

“A continuous gap between the two markets will be closely watched by the IMF in the coming days,” the analyst added.

In its Letter of Intent, addressed to IMF Managing Director Kristalina Georgieva, the-then Pakistan government had committed to ensuring that “no abnormal premium” emerges.

“Going forward, we will refrain from formal and informal guidance on the exchange rates of FX intermediaries and, after eliminating existing exchange restrictions and the multiple currency practice (MCP), will maintain a framework free of restrictions on payments and transfers for current international transactions and MCPs, and, by allowing no hindrance to the market determination of the exchange rate, ensure that no abnormal premium emerges in between the rate in any of the three FX markets—interbank, open, and informal,” it says in the letter signed by then finance minister Ishaq Dar, and current SBP Governor Jameel Ahmad.

Reasons for fall on Tuesday

Market experts were of the view that the depreciation on Tuesday was expected as economic fundamentals are beginning to kick in.

“The caretaker setup has taken over affairs of the economy, and it will not meddle too much in the currency markets,” a senior analyst, on condition of anonymity, told Business Recorder on Tuesday. “With the easing of restrictions on imports, the rupee will likely see further pressure as inflows have dried up for the time being.”

Meanwhile, Abdullah Farhan, Head of Research at IGI Securities, told Business Recorder that this was an expected development “as weaknesses in the economy remain”.

“The current account and financing gap persists. Additionally, there is some uncertainty over the timing of elections.

“The market is also monitoring to what extent the caretaker setup would implement the decisions of the International Monetary Fund (IMF). These measures would increase inflation further,” the expert added.

Zafar Paracha, General Secretary ECAP, echoed similar views.

“The decision by the IMF to allow imports would lead to further pressure on the current account,” Paracha told Business Recorder.

He noted that remittances and exports are also declining. “This is also one of the factors behind the increase in rate, as remittances are diverting towards the grey market.

“The government’s policies need to be restructured.”

Experts expect the rupee to remain under pressure in the coming weeks.

“The growth of our remittance and exports is critical,” said Farhan. “We have lost our competitiveness due to high energy prices. Moreover, remittances are expected to remain low as the gap between formal and informal channels is widening.

“However, foreign investments through the Special Investment Facilitation Council (SIFC) could be a positive,” he said.