TRYING to navigate the uncharted territory of post–Covid-19 world, private buyers have retreated from the foreign exchange market in Pakistan. Their withdrawal from the market, however, did little to support the local currency that has been on a slippery slope. The rupee traded at an embarrassingly cheap rate of 168 a dollar in the open market.

Five years back in July 2015, one dollar was worth Rs101. Currently, the exchange rate in India is Rs74.9. It is hovering at Tk84.7 to a dollar in Bangladesh. The Sri Lankan rupee is weaker and traded at 185 against the greenback last week.

The local currency did recover some ground initially as the deadly virus rattled the world. From 165 at the start of April, the currency gained eight rupees against the dollar over the month to trade at 157 on May 1. It slid back to 162 by June 1 and 166 by July 1. It slipped to 168 to a dollar when the market closed last Saturday.

The dollar trend indicates that open market operations are indeed still an insignificant fraction of the overall foreign exchange market in the country. According to banking sources, the annual turnover in the open market is in the vicinity of $4 billion in the annual foreign exchange market worth $100bn spanning imports, exports, remittances, foreign loans and debt servicing and settlement of other liabilities.

The dip in leisure travelling, overseas education spending and the suspension of khaipia business leaves open market currency operators with few options but to surrender their daily inflows in the interbank market

The dip in leisure travelling, overseas education spending and the suspension of khaipia business in the high summer season market leaves open market currency operators with few options except to surrender their daily inflows in the interbank market.

A senior banker pointed out another factor that curbed the demand for dollars in the open market. “The closure and subsequent opening of borders with Afghanistan and Iran with a greater monitoring of movement by government agencies since April on either side have restricted the scope of smuggling of the hard currency across western borders,” he said.

Bankers believe tougher regulations by the State Bank of Pakistan (SBP) on deposits and withdrawals of the foreign currency from bank accounts must also have contributed to the leaner demand of the dollar in the open market.

The SBP has barred non-filers from operating a dollar account. The depositor is obligated to declare the proof of purchase and the source of funds. Commercial banks are now required to report deposits exceeding $10,000.

Currency dealers and travel operators were baffled by the exchange rate trend. They expected the rupee to regain some of its lost strength with the weakening of the demand for the hard currency in the market.

“I have never seen anything like this ever before. We have been sitting virtually idle in an otherwise high season for our business, watching companies shedding staff and slashing salaries to survive,” said Shujauddin Ahmed, who is associated with the tour-operating business for over 30 years.

“As Covid-19 cases and the mortality rate climbed, the scare gripped the world. Booking cancellations by leisure travellers and prospective Pakistani students proceeding abroad started as early as mid-March. By mid-April, people were clamouring for a refund of tickets and hotel bookings overseas,” he said.

“If several hundred people were handling arrangements, the number of Pakistani tourists and students easily runs into hundreds of thousands. Besides travelling for leisure and education, travelling to sacred Muslim sites is common in summers. High net worth professionals and corporate hierarchy prefer months-long vaca­tions in the West. Younger couples, tight on budget, prefer Far East for a few weeks. Businessmen often take families for religious tourism to Iran and Saudi Arabia.

“More than 15,000 students leave shores for higher education. Hardly five per cent go on scholarship. The rest pay for their tuition and boarding/lodging. Then there is a band of carriers (khaipias) who travel for a day to destinations such as Thailand, Indonesia and Malaysia to purchase and bring back in personal baggage stuff like kids’ garments, personal care products and other items. Such trips increase in the Eid season on demand anticipation. From around 55-65pc occupancy on overseas flights for the rest of the year, flights leave jam-packed between May and July to a point that desperate travellers end up paying sometimes double the normal fare.

“Collectively, all these categories of travellers spend millions of dollars acquired from the local market. With almost a complete suspension of the activity since April, Pakistan has saved the hard currency on this account. The dollar is still getting dearer. I find the trend baffling,” he said while talking to Dawn.

Malik Bostan, president of the Forex Association of Pakistan, reconfirmed Mr Ahmed’s observations. “Private demand for dollars has crashed. Currently, we are trading hardly 5pc of the daily dollar supply to retail customers and surrendering the rest every evening in the interbank market.

“The gap in the interbank and open market rates is a dependable indicator of private demand. The fact that the dollar in the open market is available at the interbank rate is indicative of weak private demand,” he told Dawn over the phone.

According to Mr Bostan, one million Pakistanis travel abroad every year. About half of them choose three months of summers (May-July) for travelling. “For the exchange companies, these months are normally very busy but not this year.”

Knowledgeable sources told Dawn that multiple factors were at play in May. These included a facility to defer oil payments and the rescheduling of debt repayment along with the inflow of grants from international financial institutions that eased pressure on the rupee for a brief period.

“All facilities were time-bound and ultimately we have to clear outstanding bills and repay debts. As long as export prospects are clouded and Pakistan is dependent on imports and foreign assistance, I don’t see a significant improvement in the value of the local currency,” an expert requesting anonymity commented.

Efforts to glean information from the Federal Board of Revenue (FBR) on dollars consumed by leisure travellers and students studying abroad did not succeed. “Relevant data is scattered. The Federal Investigation Authority, Civil Aviation Authority, Federal Board of Revenue and the SBP might have some fragmented information, but I can’t think of a place where you can get it in a consolidated format,” a senior FBR officer said.

Published in Dawn, The Business and Finance Weekly, July 13th, 2020