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EDITORIAL: The gap between the currency markets — the interbank and the open market — is widening on a daily basis.

The lower value of PKR against USD in the open market is pushing the PKR to depreciate in the interbank market as well. A lot of theories have emerged about the reasons for higher depreciation in the open market.

The fact of the matter is no one knows what is happening. Everyone is shooting in the dark. And that is the scary part of the story. This type of episode happened a few weeks ago. At that time, the premise was that the confidence will restore once the International Monetary Fund (IMF) programme is back on track.

That the IMF tranche is in the SBP (State Bank of Pakistan) account and the financing requirement for the rest of the current fiscal year is more than covered is a fact. The question that begs a plausible answer is why the currency is still falling ignominiously in the open market.

There are three markets for currency in Pakistan — formal and informal open markets, and interbank market. Lately, the supply is available only in the informal market but at a steeper premium. Unfortunately, this all is happening under the central bank’s nose.

The question is: what is the central bank doing to address it? Why is it not taking any punitive action against the exchange companies or individuals involved in hoarding or other similar malpractices? What is the SBP doing to increase the inward flows? Someone must respond to these legitimate questions or concerns.

Clearly, the SBP communication (provision of information to financial markets and the public on policy issues) needs to step up. There should be a clear guideline on it. The grapevine suggests that no one knows why the supply to the open market has shrunk.

Exchange companies’ usual annual inflows are of around $2 billion in remittances, which they have to surrender to the interbank, and over $4 billion inward flows that travellers and others coming to Pakistan bring.

Is the Civil Aviation Authority’s requirement of declaration at airports to be filed by all international passengers coming to and moving out of Pakistan creating an impediment to these inflows? There is nobody from either the finance ministry or the central bank to address these questions. However, some new demand is being generated, which is drying the daily net inflow from exchange companies to the interbank market.

One more question that needs a cogent answer is whether with travel opening, the demand of foreign currency has soared. According to exchange companies, one of the reasons behind rising demand is a new UAE rule that requires all passengers to hold valid return tickets with visa and 5,000 dirhams with them when travelling to the emirates.

The customs here at home is demanding the travellers coming back to Pakistan furnish declaration of foreign currency. Needless to say, this step is adversely affecting the supply.

Meanwhile, the smuggling of food items through Afghanistan and Iran in the midst of the destruction the flash floods have wrought so far is placing added pressure on the currency in the open market.

Some believe that allowance of dollar exports by exchange companies may be doing the damage. However, these exports are under $10 million — an amount of money that is so small it is perhaps not worth considering in view of the overall enormity of the issue.

There has been talk about the impact of administrative measures the SBP has taken with regard to L/C opening. There are certain business firms that are importing stuff on bills of lading but settling import amounts outside Pakistan. Perhaps these payments are routed through purchase of foreign currency in the black market (out of exchange companies’ inflows of $4bn); and it is somehow being smuggled outside Pakistan.

That is also reducing the supply of foreign currency from exchange companies to the interbank. The central bank needs to become proactive both in terms of action on the ground and communication through regular media briefings to effectively deal with the rumours and foul play in the market.

One way or another, market distortions have come to haunt; and these are putting pressure on a beleaguered PKR in the open market that, in turn, is pushing the PKR down in the interbank market. SBP needs to reach out to stakeholders for a broad-based discussion and come up with a way to curb the dangerous divergence.

Needless to say, certain economic fundamentals, too, are playing a role in this regard. The import demand is growing again in the interbank market. And on top of all this is the political uncertainty. ‘How to take the legally earned money out of the country’ is the most frequently asked questions by the business community in informal get-togethers. Unless this sentiment is reversed, the currency and economy will only go south.

Copyright Business Recorder, 2022

Comments

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Imtiaz Ahmed Sep 09, 2022 01:59pm
Yours article last para is essence of the whole situation.
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azeemshakira Sep 09, 2022 03:02pm
Jazz
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samir sardana Sep 09, 2022 10:15pm
Part THE PKR -IBR DECLINE IS DUE TO USD STRENGTH (LAST 15 DAYS) WHICH IS DUE TO PRE RATE HIKE RALLY POST RALLY - IT WILL REVERSE, AS THE EVENT WILL BE,OUT OF THE WAY THE DISASTER IN PAKISTAN IS THAT THE OPEN MARKET IS DRIVING THE IBR. IT IS A NIL RISK FX ARBITRAGE ! THE SBP FX RESERVES ARE KNOWN,AND IT DOES NOT INTERVENE IN THE FX MARKET EXPORTERS ARE IN LEAGUE WITH THE FX DEALERS STEP 1 EXPORTS ARE ON DA BASIS SO THE REMITTANCE CAN BE DELAYED AT WILL EXPORTERS RECEIVE MONEY BY BANK TRANSFER OR VIA INFORMAL CHANNELS STEP 2 INFORMAL EXPORT PROCEEDS GO O OPEN MARKET - SO BY DELAYING IT THE PKR DEPRECIATES IN OPEN MARKET .EXPORTER IS HAPPY AS THE OPEN MARKET RATE "MAY BE HIGHER" THAN THE FORWARD RATE ON DATE OF BL SOB HAD HE SOLD THE FORWARDS STEP 3 BANKS HAVE FIXED DATES TO MAKE OIL AND GAS PAYMENTS - WHICH THE FX MARKETS KNOW - AND IF EXPORT MONEY DOES NOT COME- PKR WILL FALL SO THE OPEN MARKET RATES WILL HIT THE IBR AND THE FORWARDS.dindooohindoo
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Zafar Iqbal Sep 09, 2022 10:18pm
Very nice
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Zafar Iqbal Sep 09, 2022 10:19pm
Very nice News and update all would
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samir sardana Sep 09, 2022 10:25pm
SBP HAS 8 BILLION FX - SO ON KEY IMPORT REMITTANCE DATES - BY SELLING US IN THE OPEN MARKET IT CAN RAISE THE PKR - BUT IT IS NOT DOING SO ! THAT IS OK IF THE SBP SUPPLIES USD TO BANKS TO MEET IMPORT DUES,ON KEY DATES, SO THAT IBR DOES NOT COLLAPSE - BUT THAT IS ALSO NOT HAPPENING ULTIMATELY EXPORTS MADE VIA LCS have TO COME IN VIA BANKS - SO IT IS A TIMING MISMATCH. TIMING MISMATCHES,CAN BE OFFSET, BY SBP INJECTIONS, INTO BANKS, ON KEY IMPORT DATES. IF SBP WAS DOING THAT - THE IBR WOULD NOT FALL THE NEXT SOLUTION IS IMPORTERS NOT RETIRING DOCS VIA BANK,ANS BUYING USD, IN OPEN MARKET, AND THEN DONG HUNDIS.THIS MAKES SENSE ONLY BY DUTY EVASION ! BUT THIS REQUIRES THE USD TO BE SMUGGLED OUT OF PAKISTAN.
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samir sardana Sep 09, 2022 10:35pm
IN A NORMAL HUNDI THE IMPORTER PAYS IN PKR IN KARACHI AND THE HAWALA MAN,IN LONDON/SINGAPORE PAYS TO SUPPLIER IN USD.HOW CAN MILLIONS OF USD LEAVE PAKISTAN IN FLIGHT AND ALSO NOT BE CAUGHT AT LANDING PORT - WHAT IS CUSTOMS AND AIR INT DOING ? THE IMPORTER IS SAVING THE HUNDI COST IS BEING SAVED BY THE IMPORTER - BUT THIS CAUSES MASSIVE SHORTAGE IN THE OPEN MARKET THEN COME THE EXPORTERS WHO SEE THE OPEN MARKET RATES AND WANT TO REALISE EXPORTS AT THAT RATE.FOR THAT THEY NEED TO BRING THE USD IN CASH AND DEFER THE DA EXPORTS- WHICH CAUSES USD SHORTAGE IN IBR MARKET - AND THAT IS Y PAKISTANIS DO NOT WANT ,TO EXPORT ON LCS - AS THEN, THE LC HAS TO BE ROLLED OVER,OR XTENDED,AND IS CAPTURED BY THE BANKING SYSTEM. WITH ALL THE ABOVE PIRACY - THE OVERSEAS PAKISTANIS ALSO,DO NOT WIRE USD TO BANKS - THEY SELL TO THE OPEN MARKETS - AND THAT CREATES MORE HELL.
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samir sardana Sep 09, 2022 10:46pm
LASTLY,ONE CAN ONLY HOPE THAT,UNLIKE IN NATIONS LIKE VIETNAM,WHEN PAKISTANI BANKS HAVE NO USD ON LC RETIREMENT DATES - THEY "DO NOT" BUY USD FROM THE OPEN CASH MARKET! THAT WILL BE UNFORGIVEABLE ! SBP CAN KILL THIS ENTIRE EASY MONEY MAKING OPERATION ! Y IS EXPORT OF USD ALLOWED FROM PAKISTAN - WHEN PAKISTAN HAS A TRADE DEFICIT - ALL THE USD WITH THE DEALERS HAS TO FINANCE IMPORTS VIA BANK .SO THE BOOKS "HAVE TO BE CLOSED" VIA THE BANKS TO ENCASH THE USD BY ALLOWING THE FX MAFIA TO EXPORT USD - THE SBP HAS GIVEN THEM,A PRECIOUS EXIT ROUTE -WHICH MAKES A BIAS AGAINST THE PKR FX DEALERS IN PAKISTAN WITH A 0.5% spread,would be having a compounded return of 1000% per annum - at the minimum (with the floods,restart of travel and overseas education etc.) ALL THIS WOULD BE OK (AS PAKISTAN TOURISTS SUFFER, BUT OVERSEAS PAKISTANIS GAIN) - HAD THE OPEN MARKET RATES NOT HIT THE IBR - THAT IS THE DISASTER !
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samir sardana Sep 09, 2022 10:59pm
ANOTHER GAME IS THAT AN EXPORTER (P),HAS SOLD PKR FOR SEPT EXPIRY AT 235 ON EXPIRY THE OPEN MARKET IS 243 AND THE REMITTANCE IS A MILLION USD - SO HE IS LOSING RS 80 LACS SO WHAT DOES HE DO ? IF IBR ON EXPIRY IS 247 - P CANCELS THE FORWARD AND BOOKS LOSS OF RS 2 - P COLLECTS FROM IMPORTER (I) IN CASH AND BRINGS IT TO PAKISTAN AND SELLS IT AT 243, HE DISCHARGES THE IMPORTER (I),IN LONDON, IN WRITING - AND P,SENDS A LETTER TO HIS BANK, SEEKING TIME EXTENSION, FOR EXPORT REALISATION BY SAY 90 DAYS AT ANY TIME BEFORE 90 DAYS SINCE THE EXPORT ENTRY HAS TO BE CLOSED - IF PKR RISES TO SAY 238 IN OPEN MARKET (WHEN HE HAD 1ST SOLD AT 243)),P BUYS AND SENDS IT OUT,TO THE IMPORTER (I)WHO REMITS TO EXPORTER'S (P) BANK IN PAKISTAN TO CLOSE THE BOOKS OR IF IBR RISES TO 237 - THE PAKISTANI EXPORTER (P)WIRES OUT MILION USD AS ADVANCE TO X ,WHO THEN ROUTES THE MONEY VIA THE LONDON IMPORTER (I), BACK TO P, TO CLOSE THE EXPORT BOOKS
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Asif Rajput Sep 10, 2022 09:09am
The reasons of PKR downing and appreciation of US Dollar are expressed very rightly. The criminal silence of state authorities is definitely a major factor coupled political uncertainty.
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AOK Sep 10, 2022 12:01pm
1-liner: Regulate the distribution of all Forex; and impose strict action and penalties on the currency hoarders and mafia like M. Bostan.
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Manzar Sep 10, 2022 05:09pm
Money laundering through cryptocurrency is also adding fuel to the fire, millions of dollars being laundered every day and state authorities are not concerned at all to stop this.
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Mnadeem Sep 11, 2022 11:34am
Fortunately there is no mentioning of Incompetent govt which is the most important aspects.
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