The State Bank of Pakistan earlier this week changed its regulations by allowing banks to settle cross border transactions through debt and credit card in the interbank market. Earlier (since 2006) they were not allowed to do so and were supposed to clear the payments in the open market.

Although, they can still use open market to settle – but given the difference between open market and interbank rates, and better supply of foreign currency in the interbank market, banks are likely to settle in the interbank market. The permission is allowed for two months before SBP can reconsider it.

The rationale for doing so is that some think that higher gap between the open and interbank market is due to demand of card transactions being settled in the open market. That is an absurd argument. Credit card transactions in the open market have been happening since 2006 and there were never such gaps due to card-based transactions. And lately, after SBP imposed the limit of credit card spent per individual to $30k per year from November 2022, the value shrunk further.

In the past few months, due to the growing gap between the open market and interbank rate, credit card transactions have been brought back into the limelight. There was some noise. Majority of elite -writing opinion piecesor tweeting, were using credit cards for forex transactions and were paying open market premium. They were constantly talking about it.

Since it was in the limelight, exchange companies’ folk (who have two books – one documented and other undocumented) attempted to shift the burden of higher open market demand on the cards’ payment settlement. Day before yesterday, SBP called banks and asked what to do to lower the gap, banks advised SBP to transfer the cards payment to interbank- as interbank market is lately in surplus while open market in deficit andby shifting cards to interbank market is an attempt to balance this out.

The next day SBP came out with a circular to allow card-based transactions to the interbank market. And the very next day, there was some correction in the open market which came down from 315 to around 300 against USD. The question is whether this is because of shifting the cards to interbank or something else is into play.

Well, the card market at is around $3-5 million per day (or even less), as against the claim of open market gurus of $15 million per day. And the market size is shrinking due to SBP’s restrictions. How can this strip the demand of open market significantly where the gap is increasing due to hundi halwa demand.

The hawala demand is of illegal buying of dollar which are to be settled outside Pakistan against (mostly) inward remittances. These exchange companies are champions of it. They do shady business and attempt to divert the attention. Hawala demand is due to three factors. One isthe demand for capital flight, as many wealthy people are transferring wealth outside Pakistan.

The second and bigger reason is growth in informal imports (smuggling) after the allowance of 365 deferred payment facility on imports by SBP. This was done by SBP under the pressure of the business community, as formal imports are being restricted. Volumes are picking up in the market and smugglers are having a field day along with forex companies illegally involved in hawala business.

Then the third reason is demand of foreign currency for Hajj related expense which has also being transferred to the open market.

Without arresting these trends, shifting the card payment to the interbank would have a limited impact on the correcting of currency in the open market. Anyhow, it’s good for people transacting on the cards in foreign currency – as they would pay, better rate. The solution, however, is to have a strategy to end the open market and have just one -interbank market of forex – as is the case in most of the world. Pakistan is no exception.