KARACHI: The State Bank of Pakistan (SBP) has allowed banks to acquire US dollars from the interbank market for the settlement of card-based cross-border transactions with the International Payment System, apparently to bring down the dollar rate in the open market.

The SBP issued a circular on Wednesday, which indicates that this is a short-term move as the permission granted to banks will end on July 31.

However, currency experts and bankers dealing in the currency business said it was a vital move, particularly due to the higher rate of the dollar in the open market. The open market dollar rate is elevated by Rs30 to Rs35 per dollar.

“It has been decided to allow authorised dealers to purchase US dollars from interbank for settlement of card-based cross-border transactions with IPS (International Payment System),” the SBP circular said.

Banks have been buying dollars from exchange companies for the last 17 years, while last year several banks were found artificially increasing the dollar rates for their own financial gain. The SBP had allowed the banks to purchase dollars from exchange companies through a circular issued on May 17, 2006.

“The SBP made the right decision at the right time. It will bring down the open market dollar rate up to Rs20-25. It will also help to narrow the huge gap between the interbank and the open market,” said Zafar Paracha, General Secretary of Exchange Companies Association of Pakistan.

Due to a shortage of dollars in the open market, the rate for the greenback has been steadily increasing. Consequently, the overall business volume has significantly declined, reaching only 20 per cent compared to the normal day trading volume.

Exchange companies said that the escalating dollar rates in the grey market have severely impacted their business, resulting in a depletion of inflows. Simultaneously, the frequent appreciation of the dollar against the PKR has discouraged foreign currency holders in Pakistan from selling their holdings, further diminishing market trading to just 20pc.

“Out of this remaining 20pc trading, 15pc was the business with the banks as they were buying dollars from exchange companies for credit cards. Now it has also gone and we were left with just 5pc business,” said Mr Paracha.

He welcomed the SBP’s latest move to stabilise the exchange rate.

Bankers, however, termed it a surprising move and asked for time to process and comprehend its impact.

A senior banker said that while the banks are already short of dollars and the SBP does not allow opening of Letters of Credit, buying more dollars from the banking market raises questions. He said that banks normally buy $30 to $40 million per week for credit cards, which means banks need a minimum $120m per month.

“The outflows of dollars would be higher from the banking system after this move, which is not required by the SBP or the government. This is the reason that the latest move would be applicable for just two months,” he said.

“These instructions are applicable with immediate effect till July 31, 2023, unless otherwise notified,” said the SBP circular.

Bankers believe that the short-term impact on open market dollar rates would be positive, but they express doubt about the sustainability of this effect over a longer period. They also expressed doubt that issuance of credit cards could be restricted through this SBP decision.

They observed in case of a drop in the open market dollar rate, remittances through the banking channel could rise. Remitt­a­nces have declined by 13pc during July-April FY23. Currency experts believe this decline was due to the significantly higher dollar rates in the grey market.

Published in Dawn, June 1st, 2023