KARACHI: The rupee, facing the brunt of dollar shortages, plunged 2.6 per cent against the greenback in the open market on Monday as speculators are holding back their foreign currencies anticipating further appreciation.

The currency dealers said that despite very thin business volume, the open market was dry, which allowed the dollar to resume its upward trend and closed at Rs308, an increase of Rs8 from Friday’s close.

A trust deficit was also noted as people claimed that the State Bank of Pakistan and the government artificially planned to bring down the dollar in the open market. This perception discouraged the general public from selling their foreign currencies and led them to wait for further changes.

Last week, the SBP allowed banks to purchase dollars from the open market for credit cards, which are used for international payments. This decision swiftly led to a decline in the dollar’s value in the open market, ranging from Rs11 to Rs15 per dollar. The dollar reached as low as Rs298-299, compared to its previous range of Rs318 to Rs320.

The exchange companies on Monday quoted a price of Rs308 for a dollar; however, they did not have actual dollars available. These rates were indicative, and the real rate is determined by the grey market, which operates parallel to the legal rates.

People hoarding foreign currencies anticipating further appreciation

“The grey market has already replaced the exchange companies while their business is flourishing at the cost of legal inflows like remittances and export proceeds,” said Zafar Paracha, General Secretary of the Exchange Companies Association of Pakistan (ECAP).

The banks used to purchase $120 to $160 million per month for credit cards. However, last week, the SBP issued a circular allowing the banks to acquire the dollar from the banking market for only two months.

Bankers have expressed concerns over the SBP’s decisions, as they only seem to benefit those who have sufficient funds for international travel or online shopping. They said that opening Letters of Credit for imports remains a challenging task. The SBP has been attempting to regulate every dollar leaving the country, but the latest decision appears to contradict its very policy.

Foreign companies with investments in Pakistan have been able to send only $253m as profits during the first ten months of FY23, compared to $1.3 billion during the same period last year. This withholding of profits is detrimental to foreign investment in Pakistan, which already stands as the lowest in the region.

“There is no doubt that the SBP and the government are influencing the exchange rate in the banking market and the rate has maintained in the range of Rs280 to Rs290 for the last couple of months,” said Atif Ahmed, a currency dealer in the inter-bank market.

Meanwhile, the rupee depreciated by 0.18pc against the dollar in the interbank market. According to the State Bank of Pakistan, the dollar closed at Rs286.19 in the interbank market compared to Friday’s rate of Rs285.68.

Mr Paracha said the grey market dollar rate was Rs320 on Monday. “How can the government convince the overseas Pakistanis to send remittances through banking channels and bear the per dollar loss as Rs22,” said Paracha, adding that this was the reason for 13pc low remittances during the 10 months of FY23. He said export proceeds also reflect the same situation.

Currency experts have pointed out another significant flaw in the SBP’s decision, which allows importers to arrange dollars for imports but fails to provide a designated window for purchasing dollars. As a result, importers are left with no choice but to acquire dollars from the Hundi and Hawala markets.

“The illegal market is flourishing through a legal decision of diverting importers towards the grey market,” said a senior banker.

Published in Dawn, June 6th, 2023