KARACHI: The US dollar lost up to Rs15 in the open market on Thursday in response to the State Bank of Pakistan’s (SBP) decision to allow banks to purchase greenbacks from the interbank market for the settlement of card-based cross-border transactions.

The open market started with low dollar prices and traded as low as Rs298 compared to Rs311-318 a day earlier. The practice to buy dollars from exchange companies for the settlement of card-based transactions with the International Payment System (IPS) started in May 2006.

For narrowing the widening gap in dollar rates between open and interbank markets, the SBP took this vital decision to comply with one of the conditions set out by the IMF for reaching a staff-level agreement for unlocking the stuck-up tranche. The Exchange Companies Association of Pakistan (ECAP) reported the closing price of the dollar in the open market at Rs299 while the Forex Association at Rs298.

The closing rate on Wednesday was reported at Rs311, meaning the dollar lost Rs12 or Rs13.

Central bank reserves fall by $102m

Currency experts said, however, the dollar was being traded at rates which were much higher than those quoted by the exchange companies. The dollar was traded between Rs318 and Rs320 on Wednesday before the SBP decision.

Negative impact

The State Bank’s decision succeeded in bringing down the dollar rates in the open market, but there is still a difference of up to Rs13 per dollar. Currency experts said banks’ clients would benefit from this gap and now they can buy dollars at lower rates.

This may allow holders of credit cards to transfer money outside the country. But it would bring more pain to a country already suffering from a shortage of dollars and a rising debt servicing amount.

“A cheaper dollar could be utilised by illegal currency operators for their payments. They can buy dollars from the interbank market at Rs285 — six to nine per cent lower than the current open market rates. This will lead to a flight of dollars from the country,” said Malik Bostan, Chairman of the ECAP.

He suggested the imposition of a 10 per cent tax on credit card holders on shopping for luxury items outside the country. He said settlement of payments by illegal operators through credit cards and shopping of luxury items would destroy the entire effort of the government and the State Bank to save dollars.

Incentive for the rich

Some senior bankers and currency dealers, however, criticised the central bank’s decision.

“The decision has been taken for the rich who will now enjoy summer holidays in Europe and the United States with cheaper dollars,” said a senior banker.

The State Bank’s circular issued on Wednesday said these instructions were applicable with immediate effect till July 31.

He said hundreds and thousands of Pakistanis travel during the summer holidays with their families, but there is no official data available about the number of travellers. The banker expressed concern about the timing of the State Bank’s decision.

“There’s no doubt that with this decision higher outflows of dollars will take place. This will simply add to the misery of the country’s poor,” said the banker.

Banks buy $30-$40m every week for credit cards. Keeping a minimum of $30m per week means $120m per month and $240m in the next two months would be required.

Depleting reserves

The State Bank reported on Thursday that its foreign exchange reserves had further declined by $102m during the week ending on May 26. The central bank could hardly stay with $4 billion reserves while it needs $3.7bn for debt servicing till June 30.

The State Bank said the amount of $102m was being used for the payment of external debt servicing. The country’s total reserves fell to $9.513bn, including $5.422bn held by commercial banks.

The reserves of commercial banks declined by $116m during the same week.

Published in Dawn, June 2nd, 2023