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Coronavirus
LOW Source: covid.gov.pk
Pakistan Deaths
28,753
824hr
Pakistan Cases
1,286,022
39124hr
0.89% positivity
Sindh
476,233
Punjab
443,310
Balochistan
33,491
Islamabad
107,811
KPK
180,194

It is very unfortunate that Pakistan's foreign exchange market is not based on fundamentals that are there in other jurisdictions. The peculiarities of Pakistan's exchange system are briefly described as under:

• Huge Hawala market: Workers' remittances, their volume, their origin in Gulf countries and liberal foreign exchange system of the UAE and other Gulf States constitute a natural cause of an informal 'Hawala' market for cross-border transactions. In Hawala transactions, there is no movement of foreign exchange, however, wherever Hawala is used the remittances that were supposed to come do not arrive in the country. In other words, there is diversion of funds which were supposed to be received. It is my view that the amount received as remittance as net of Hawala is around USD 2 to 3 billion or, in other words, the total quantum of Hawala is around 2 to 3 billion dollars a year. It is considered that the present pressure on rupee is being created, inter alia, by financing Hawala which means that remittances are delayed with payment in PKR to the person who is supposed to receive this sum. In other words, the rupee in Pakistan is being used to defer receipts in anticipation of a higher parity rate in future. Exchange companies are principal facilitators.

• Legal imports versus smuggling: It is unfortunate that we have not been able to control smuggling which is undertaken, inter alia, under the guise of Afghan transit trade. The importer or smuggler as the case may be shifts smuggling into official imports on the basis of cost of smuggling, the margin requirement on L/C and valuation at the time of imports. In the past, there was a liberal regime for imports even for non-essential items; therefore, it is estimated that a substantial sum has been transferred from informal to the formal sector in imports. This creates unpredictability.

• Easy rupee convertibility at exchange companies: In Pakistan, there is convertibility of rupee in USD through exchange companies without any proper scrutiny and identification of the sources of money. This unwanted easy convertibility places excessive demand on USD and in this speculative environment USD becomes a lucrative investment for the short term. On account of widespread cash economy there is a constant pressure whenever there is a wave, and unwarranted speculative assertion as has been made by Fitch, a global rating agency.

On account of the factors as referred above it becomes difficult to predict exchange rates in Pakistan using the fundamentals technical basis. Nevertheless, there are measures to handle this malpractice. The current wave of speculation was not based on fundamentals or factors which Fitch indicated. They appear to be a part of speculative sentiment. Amongst other factors this wave has been created on account of the present state of affairs of political relations between the USA and Pakistan. A sentiment has been created that the USA will not be liberal in its support for Pakistan. A perception has been created to the effect that there will not be further financial support in relation to a variety of issues, including those relating to the IMF conditionalities, from the USA to Pakistan. This is no correct appreciation of the Pakistan-US relationship. Pakistan has adopted correct policies with regard to Afghanistan and the USA now needs more Pakistan's pro-active support to unwind the situation in Afghanistan than in the past. Taliban are temporary rulers who will require public mandate to rule Afghanistan in the long run. That public mandate can never be attained without taking all stakeholders into confidence. Both the USA and Taliban know that quite well. Ultimately, Pakistan will be benefiting from its correct approach to evolving situation in Afghanistan.

The other factor that has multiplied the crises is upfront booking for imports and delays in receipts of export proceeds wherever possible. This is a natural factor in such a speculative environment. State Bank of Pakistan has already intervened in the market in a non-traditional manner. It is reported that exchange companies are being strictly monitored, L/C margins on imports for nonessential items have been increased, border controls to curb inflows into Pakistan of Pakistani rupee have been tightened and a strict vigilance is anticipated on the sale of USD against the Pakistani rupee by exchange companies to non-Pakistanis being the Afghan people. It can be plausibly argued that the Pakistani rupee will stabilize in near future. There is a strong need to strengthen regulations to curb Hawala in line with an Indian legislation to tackle the peculiarities referred above. Gambling or speculation is a disease that does not result positively in the long run. It is also not allowed under theological considerations. The fact that PKR or any other currency is not a commodity cannot be over-emphasized.

(Concluded)

Copyright Business Recorder, 2021

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