The currency is under pressure again. The gap between the interbank and open market is expanding and the pressure is building. The confidence, it seems, is eroding. Folks believed that after the IMF, the PKR would begin to stabilize. It did, but only for a couple of days. The current stabilized once before when the IMF staff level agreement took place before becoming erratic again. It stands to reason then that markets are uncertain—both on political and economic fronts—which is destabilizing the currency. At the same time, the increase in illegal flows in the open market may also be generating pressure from Peshawar which is jolting Karachi.

There are three exchange rate markets in Pakistan. One is interbank – where banks deal, and it is the main market with a large value. Second is the exchange companies’ formal open market where small ticker size transactions happen. Third is the grey open market where informal flows take place without any official record. Exchange companies work in both second and third markets. Usually, the interbank market sets the value in the other two markets. But at times, these exchange markets influence the interbank market. That is when the gap between the interbank and open market widens. That is happening now with the gap at historic highs.

Yesterday, in the interbank market, PKR/USD closed at 221.4. While the exchange market was around 232-233 and informal market was roughly at 235. And there was little supply in the open market. The pressure lately is building from the informal open market where high demand is coming from Peshawar. Some say that this is due to increase in informal trade of food items (mainly vegetables) from Afghanistan and Iran, and that is resulting in high demand for dollars to pay against the goods.

Another reason exchange companies are citing is that due to floods, supply from informal small players is not coming. Moreover, the increase in travel is generating demand for foreign currency. This is augmented by the condition imposed by the UAE government for Pakistanis to carry a certain amount of Dirham when travelling to the Emirates. Meanwhile, here at home, the government is asking travelers to disclose any foreign currency in cash they are carrying when coming back to Pakistan. “It is a strange crisis, I have never seen such conditions in my career”, lamented one exchange company official. According to him, the daily inflows in his company have reduced from $2-2.5 million to mere $100-150K.

The demand epicenter in the informal market is Peshawar. Here the rate is higher than formal exchange market. The small traveler or buyer doesn’t care about formality and go to the place where it gets better rate. Sellers are going to informal players. That is pushing the formal exchange companies to match the rate. And in the process, gap between the open and interbank market is growing. Seeing that, the remitter is slowing its inflows or moving towards informal segment, as it is yielding better returns. Exporters are of course waiting. As much as they can. The situation is not coming under control.

Last time (a few weeks back) when the open market was at a high premium to interbank market, one single day improvement in the interbank shifted the open market from steep premium to a steep discount. The sentiments did the trick. Open market folks are looking at a reversal in the interbank to switch, while the interbank participants are blaming open market players to dampen the sentiments.

The real issue is weak economic fundamentals and political uncertainty. Nothing is happening right. SBP has tightened the imports through administrative measures. There is a huge backlog of payments. That is not stopping confidence from restoring. And now add the floods woes to it. The oil prices have dipped which may ease some pressure. But, to make PKR to come closer to its fundamental value (based on REER and current account), the political temperature needs to cool down.