The yawning gap between US dollars open market rate and the inter-bank rate versus the rupee is an alarming sign. The spread is lately hovering around 170-190 paisas, compared to its historical average band of 15 - 20 paisas.
This means that the growth in home remittances, that had contributed towards reducing the current account deficit and cushioned the decline in foreign investments in the balance-of-payment account, is now in doldrums.
With a significant rise in the gap between open market and official rate, it is feared that expatriates might hold back or shift more towards the non-banking channels for the transfer of money.
The State Bank of Pakistan addressed the shortage of cash dollars in January by providing between $20-25 million to exchange companies. This has, however, failed to overcome the anxiety level, mainly due to rumour mongering.
Besides rumours, there are other reasons behind this widening gap. One such explanation is an increase in the smuggling of dollars through the porous border with Afghanistan. It is cited that top level changes in FIA have effectively paralyzed the system to check the capital flight, which is more of an administrative failure of law enforcing agencies.
But does that warrant this sudden disliking for the rupee, as the weakening of FIAs system can only be partially attributed to rupees slide in the open market? Well, there are other profound reasons to the story as well.
As mentioned earlier in these columns, the rupee tends to move southwards every time as IMFs economic review draws close. For instance, the rupee depreciated by 16.4 percent between Jun-Oct 08 (the time of negotiations with IMF on bailout package), whereas a similar pattern was seen later in July last year.
Now, with IMFs review due soon again, the rupee is attempting to adjust to its real value. However, this time the movement is confined to open market, whereas the currency is stable in the inter-bank market. It would be interesting to see how the IMF reacts to this behaviour, as official flows have been smooth this month.
Moreover, reports suggest that the central bank was also eyeing higher currency-in-circulation and rumours of demonetizing five thousand rupee note were floating around. This threat may have also caused a shift in hoarded money, from rupee to foreign currencies.
Its near to impossible to assign weights to these subjective reasons but whatever is behind the markets aversion to rupee, the lack of vigilance on part of the FIA is detrimental to the fate of currency parity and in turn foreign inflows, especially remittances.
Since the central bank is providing incentives to banks to channel remittances by giving them a commission of 25 Saudi Riyals per transaction for remitting anything above $200, inflows through exchange companies have significantly dwindled.
Overseas exchange companies have signed up with Pakistani banks on account of sharing of the commission making local exchange firms less competitive. This is despite the fact that exchange companies work till late hours as well as on Sundays, whereas banks transactions are typically confined to 0900 - 1330 hours.
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INTER MARKET DOLLAR SPREAD
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Period Kerb Mkt Interbank Spread
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Q1-FY09 74.42 74.25 0.17
Q2-FY09 80.38 79.93 0.45
Q3-FY09 79.75 79.75 0.00
Q4-FY09 80.87 80.77 0.10
Q1-FY10 82.74 82.69 0.05
Q2-FY10 83.81 83.66 0.15
FY09 78.85 78.65 0.20
FY10* 83.49 83.34 0.15
Jan26 86.30 84.60 1.70
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* YTD FY10 on Jan10
(Source: SBP)
Based on Average Closing Exchange Rate
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