Countries like Pakistan cannot imagine an economy without dollars, but the situation is heading fast in this direction and policymakers either look helpless or are simply waiting for the economy to default. This was the crux of currency market’s feelings on Friday.

The State Bank of Pakistan (SBP) governor, while assuring the nation that the problem is being overblown, has said dollar outflows have emptied the central bank’s wallet. On July 22 alone, $754 million flew from the SBP reserves and the total further fell to $8.57 billion, which is enough only for five weeks of imports.

July proved to be the worst month of the new fiscal year (FY23) for the local currency as it lost 14.14 per cent in value against the US dollar. The rupee has lost 26.26pc during the calendar year and 36.38pc since May last year.

What is more important is that the calculations are based on official dollar rates reported by the State Bank, but the actual rates are much higher than the reported ones.

Greenbacks trading at ‘astronomical level’ in open market; LCs being opened at ‘higher than’ SBP-notified rate

Anchorperson Kamran Khan in an ‘SOS tweet’ reported that Pakistan State Oil (PSO) retired a letter of credit (LC) of $64m at the rate of Rs248 via National Bank of Pakistan. It should be considered the official dollar rate, while the SBP-reported price was Rs239.94 on Thursday.

Importers complain that the banks are charging an even higher price of dollars as the shortage has created greater space to earn profits on each dollar.

Former SBP governor Reza Baqir was determined to interfere in the exchange rate if the situation went out of control. It was stated when the exchange rate was left at the mercy of the market. The free exchange rate was managed to some extent during the previous governor’s tenure, but the new government, under pressure from the IMF, was not ready to touch the exchange rate.

“I don’t have official information, but our currency market believes that the government has assured the IMF of Rs250 per dollar rate, that may further rise to Rs275,” said Atif Ahmed, a currency dealer having an experience of 25 years in the interbank market.

Read: Is the rupee too weak to recover?

He said the State Bank was selling 20-25m dollars in the interbank market daily and kept the dollar rate at the desired level, but it had failed to support the local currency. The central bank usually provides $50,000 to an importer who has to manage the rest for import requirements. Only a few importers get one or two million dollars for imports, Mr Ahmed said.

“The imports in July will surely decline. It will affect government’s income from import duties,” he said.

Banks are allowed to manage and sell dollars at rates which are suitable to them. “With the rupee crisis spiraling out of control, the risk of a wider, more detrimental crisis through inflation, closure of factories, unemployment, law and order situation has increased.

Time is running out for a purposeful intervention in the currency market,” said Komal Mansoor, Head of Research at Tresmark, a web-based terminal for financial markets.

The dollar has practically crushed the local currency. Over 36 per cent appreciation of the dollar since May 2021 flooded the economy with high inflation. Both the government and State Bank have warned of higher inflation in FY23.

For the first time after 15 days, the dollar slightly declined by 57 paisa to Rs239.37 on Friday. It was surprising for the market, but some of the currency dealers said importers had stopped opening LCs for the time being due to frequent appreciation of the dollar against the rupee.

The open market has been selling 95 per cent of their dollars to banks, but over the last three days this process has came to a halt.

“Over the last three days, we have not been able to sell dollars to banks since the ‘smugglers’ in Punjab and Peshawar were extremely active and most of the dollars from grey markets were smuggled to Afghanistan,” said Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan.

The dollar was sold at Rs246 in the open market, while the ‘grey market’ was offering Rs255 because the dollar rate stood at Rs260 in Afghanistan.

“I issued a press release on Thursday asking the relevant authority to stop this smuggling of millions of dollars. Today, I feel that a positive result has come out of it,” said Mr Paracha.

He said the situation was alarming for the economy and the country, and the government, State Bank and all stakeholders should to pay full attention to resolve the issue.

Published in Dawn, July 30th, 2022