EDITORIAL: In a recently issued circular, the State Bank of Pakistan (SBP) has allowed, albeit temporarily, exchange companies to export cash US dollar (USD) consignments. Earlier, exchange companies were allowed to export all the currencies except USD and were supposed to bring back the equivalent amounts of USD to their foreign currency accounts. Lately, the supply of USD in cash form is in abundance with the exchange companies as many (including speculators and hoarders) are selling the USD because of PKR appreciation. Earlier, the exact opposite was happening.

This trend reversal has resulted in higher appreciation of PKR in the open market as compared to the interbank market. Earlier, depreciation was higher in the open market. The volatility — both ways — is higher in the open market. The exchange companies were finding it hard to sell the growing inventory of cash USD.

Banks are not keen to buy as they have to assume the risk till the money moves into the account and also as most banks have instituted a charge on cash handling. In case of transactions taking place through bank accounts, the process remains seamless.

The higher cash holdings with the exchange companies have resulted in sharp appreciation of PKR in the open market. The rate came down from 240 plus to 210 plus in just two days while the movement was much more orderly in the interbank market where SBP is working on its stated objective to curb ‘abnormal’ daily volatility — both ways — through its interventions.

Exchange companies seemed particularly worried about this development. And SBP has allowed them to export USD on consignment basis through cargo or security companies till the end of September. The companies must ensure the availability of enough liquidity in their outlets to cater to the current demand. Exchange companies obviously are happy to accept this measure and are therefore grateful to the SBP.

After this move, the gap between the open market and interbank market has narrowed to the usual level and is expected to remain so. This also implies that the room for currency appreciation is limited for now. On Wednesday, the appreciation streak of PKR ended after 11 working days when the USD strengthened in the international market on news that the Fed may consider another rate rise to control inflation.

The sharp depreciation of the PKR earlier was a result of speculation; it was not really in sync with economic fundamentals. Political uncertainty and doubts on the revival of the IMF (International Monetary Fund) programme were the reasons behind people’s loss of confidence in the currency.

In addition, increased oil and gas imports at peak rates in May and June had led to pressure on payments. Seeing that, exporters were keeping the flows outside as much as they could. There was a sort of panic buying of dollars in the open market.

There appears to be a reversal in sentiment with the IMF board meeting in sight; as a result of which the PKR has stabilised for a couple of days. The change in sentiment has also led to exporters bringing their held export dollars back that has eased the pressure of imports. That resulted in sharp appreciation of PKR on 3rd August in the interbank market. Seeing that, the open market was flooded with sellers.

And that has resulted in higher cash holdings of exchange companies which they were finding hard to sell in the interbank market. Now with the export, they can bring those into the NOSTRO account from where banks can buy dollars in the interbank market to meet their payments demands. This will run smoothly till the time the demand of USD spikes in the open market.

Copyright Business Recorder, 2022