There remains no doubt that black market forces are playing havoc with the Pakistani rupee. The government must keep the holes plugged – and work with the IMF to correct the exchange rate mechanism.
By Muhammad Ali
ISLAMABAD: Although it hardly solves Pakistan’s hard currency crunch, the rupee’s impressive rally against the dollar since the government flexed its administrative muscle demonstrates how strong a pull the black market exerts on the country’s beleaguered currency.
The government’s strong resolve to act against shady forex transactions was voiced by Chief of Army Staff (COAS) Gen Asim Bajwa in multiple meetings with the leading lights of the country’s business community.
This was followed up with the law enforcing agencies acting against speculators SBP pressing the exchange companies to clean up their act. A parallel effort was undertaken to tighten the screws on smugglers’ haulage routes and warehousing facilities.
Trading at around PKR 330 in the open market as of September 3, 2023, the greenback started to slide on a daily basis, reaching approx. PKR 302 by close of business on September 8, 2023 – closely aligning with the official rate. A leading currency dealer said Friday he saw the dollar gravitating toward a PKR 250 peg.
The appreciation of the rupee against the dollar is a good omen because an overvalued dollar is probably the strongest driver of inflation in the country. A weaker rupee means higher fossil fuel prices, which inevitably results in higher electricity prices. Both these prices then feed price inflation for every single commodity.
Simultaneously, a weaker rupee inflates the country’s import bill and debt burden, further compounding the hard currency crunch. For all these reasons, quite a few sane voices have long been pressing for strong administrative measures to prevent pilferage of the country’s hard currency reserves.
Under the circumstances, it is encouraging that the caretaker government has empowered the FIA to take stern actions against smuggling of hard currencies as well as of commodities.
On the other hand, the rupee’s appreciation cannot really go very far as long as Pakistan is unable to generate adequate dollar inflows to offset the outflows necessitated on account of debt service and imports.
In the near term, therefore, Pakistan is stuck with ponying up enough foreign exchange through a mix of multilateral and bilateral credit to bolster the meagre inflows generated by remittances and exports.
Pakistan’s flimsy forex cover further complicates the situation in terms of currency valuation. The official foreign exchange reserves held by the State Bank of Pakistan (SBP) depleted by USD 1 billion in the last six weeks, declining from USD 8.7 billion to USD 7.7 billion from July 14, 2023 to September 1, 2023.
Official data confirms that the foreign exchange reserves held by the State Bank of Pakistan (SBP) touched USD 8.727 billion on July 14, 2023 after receiving a USD 2 billion deposit from the Kingdom of Saudi Arabia, a USD 1.2 billion tranche from the International Monetary Fund (IMF); and USD 1 billion inflow from United Arab Emirates (UAE).
The central bank had then stated that consequent to the above inflows, its reserves increased by USD 4.203 billion to reach USD 8.727 billion as of July 14, 2023.
However, as of September 1, 2023, the SBP reported the foreign exchange reserves at USD 7.7 billion, owing to debt repayments and increased import bill payments in the intervening period.
Another area of concern is the understanding with the IMF to keep the official exchange rate within 1.23 percent of the open market rate, effectively putting the open market in the driving seat in determining the exchange rate.
Apart from the fact that the open market rate is dictated by the black market, this arrangement is also unfair because the vast majority of currency exchange transactions (about 90 percent) take place in the interbank market, only a minority (about 10 percent) happening in the open market.
Now that there is no dearth of evidence to demonstrate how black market forces are playing havoc with the Pakistani currency market, the authorities will do well to take up the matter with the IMF forthwith. Left at the whims of black market forces, the rupee will forever remain undervalued and volatile.
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