KARACHI: Customers using their cards (debit or credit) to conduct foreign currency transactions will have to be vigilant as the gap between the central bank-quoted inter-bank and ‘open-market’ US dollar rates has widened by over Rs24, highlighting the difference in how the greenback is being valued in two formal marketplaces in Pakistan.

A customer was charged Rs250.95 to the US dollar for a transaction posted on January 3, a day when the closing inter-bank rate was quoted by the State Bank of Pakistan (SBP) at Rs226.94 — a massive gap of Rs24.01.

Data gathered and verified by Business Recorder over the last 14 months shows that the gap on dates a foreign currency transaction was posted and that day’s closing inter-bank rate has usually stayed inside Rs5. However, there were multiple occasions when this difference went beyond Rs5, especially around the time the currency market was deemed volatile, and the rupee depreciated at an alarming pace.

Bankers, speaking on condition of anonymity, told Business Recorder that a volatile market usually sees a wider gap between inter-bank and open-market rates.

The trend showed the gap widened to over Rs13 in July, which happened to be the worst month for the Pakistani rupee in over 50 years. That month alone, the currency depreciated 14.5% against the US dollar in the inter-bank market against a cumulative 22% fall in the entire year. Data shows a bank used the conversion rate of Rs252 on August 1 (transaction’s posting date) when that day’s closing inter-bank rate, according to the SBP, was Rs238.84 to the US dollar.

However, this time, the gap is even higher and comes despite the SBP-quoted inter-bank rates having moved less than Rs7 since November 1, 2022.

When approached, the SBP said it has no comment on the matter. The bank in question also declined to comment. However, as part of its terms and conditions, the bank says the “rate charged for this conversion is the prevailing open market rate quoted to us at the particular time.”

Analysts and market talk suggest the wider gap is due to the massive shortage of foreign exchange in both inter-bank and authorised exchange companies, which the government has repeatedly blamed on “widespread smuggling to a neighbouring country”. In such a situation, foreign currency is being diverted to unauthorised persons who are charging Rs250-260 per US dollar.

Stakeholders have, however, been left wondering why has the government not acted on the matter, despite having knowledge of the menace.

The development is an added headache for policymakers that have been left scrambling to secure dollar inflows amid worries over Pakistan’s ability to meet debt obligations and a stalled programme with the International Monetary Fund (IMF).

Shortage of foreign currency has been felt in currency markets for a few months now. In October last year, Business Recorder had reported that consumers were left running from pillar to post as the open market ran massively short of US dollars with transactions happening only through “connections”.

Since then, the shortage has worsened. While the inter-bank rates have remained largely stable, according to SBP data, many believe the quotes are meaningless in the absence of a large volume of transactions, which have diverted to the simultaneous kerb market.

This ‘premium’ is also encouraging remittances to make their way into Pakistan through ‘hawala/hundi’, a practice deemed illegal and over which the SBP in November introduced a whistle-blowing initiative aimed at discouraging unauthorised foreign exchange activity.

In November, inflow of overseas workers’ remittances dropped over 14% on a yearly basis, clocking in at $2.11 billion. This was also the third successive month of decline, and comes in tandem with the rupee’s perceived stability in the inter-bank market.

The lower inflow of remittances – one of the ways for commercial banks to meet its dollar demand – has also been highlighted by JPMorgan in a recent report that said remittances have tapered off due to the “slower pace of adoption of digital remittance services as borders reopen and international travel normalises”.

“Other reasons may include the moderation of oil prices since 2Q22 and the stabilization of the PKR (Pakistani rupee), which might have reduced incentives to remit back Foreign Exchange FX,” said JPMorgan.

Worries for Pakistan, undergoing serious economic distress, have also been compounded over the fall in SBP-held foreign exchange reserves that hit their lowest level since April 2014 – standing at a meagre $5.82 billion, according to latest data – with administrative controls and import curbs also partially slowing the pace of the decline.

Pakistan reported a trade deficit of $17.13 billion during the first half (July-December) of the current fiscal year, but the gap reduced mainly on account of lower imports.

Copyright Business Recorder, 2023