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Pakistan’s inability to curb the rise of smuggling and enforce regulation has enabled the ‘grey’ currency market to prosper, a fact admitted by Finance Minister Ishaq Dar, and reiterated by the Exchange Companies Association of Pakistan (ECAP) on Wednesday.

Pakistan’s rupee has remained largely stable in the inter-bank market, hovering around the 223-225 level for almost a month. This is a far cry from the volatile year the rupee has witnessed, hitting its record low multiple times, and losing 21.5% of its value against the US dollar.

However, the stability has not amounted to tangible benefits to the economy, say experts who believe the widening spread with the open markets (formal currency exchanges) has only encouraged smuggling and also put question marks on whether the rupee is fairly valued in the inter-bank market.

At the same time, the emergence of a ‘grey’ or ‘black’ market, where volume of undocumented trades at high premiums, has also resulted in remittances taking the illegal route into the country.

“At present, the grey market is booming,” said Zafar Paracha, general secretary at ECAP, during an interview with a private TV channel on Wednesday. “The government has imposed stringent measures on exchange companies. We are unable to meet public demand.

“This is encouraging the grey market where the appetite is much higher. There is also a significant difference in the rates offered.”

Paracha’s comments referred to administrative controls introduced by the State Bank of Pakistan (SBP) in recent months as it moves to curb the outflow of dollars in the wake of low foreign exchange reserves.

Rupee remains stable, settles at 224.71 against US dollar

Paracha urged the government to ease some of the regulations on exchange companies, which he believes would enable ECs to meet customer-demand.

“Customers and transactions are moving away from official channels. Our remittances have also declined, as there is a massive gap. Overseas Pakistanis are using the grey channels.”

According to background conducted by Business Recorder, trades in the ‘grey’ market are taking place at rates between Rs240-245 to the US dollar. The official ECAP rates, however, suggest the US dollar should be available at Rs234, still a wider spread with the inter-bank market where the rupee is at Rs224.71.

The ECAP official said the open market has become unattractive. “Buyers are coming to us, and we are catering to those whom we see as genuine.

He claimed that customers are also purchasing dollars from the open market, and subsequently proceeding to sell them in the grey market at a premium. “This is a big issue for us,” he said

“Some are selling their dollars in the grey market, while some are withholding their foreign currency.”

The emergence of the ‘grey’ market has added to the headache of policymakers in Pakistan who continue to scramble for additional funding from different avenues with foreign exchange reserves held by the SBP dropping to their lowest level since January 2019, and barely enough to cover 1.5 months of imports.

Meanwhile, talks with the International Monetary Fund (IMF) are continuing with the lender calling the discussions to date in the context of the 9th review productive on Tuesday.

Pakistan is also seeking financial help from Saudi Arabia that will include doubling the current deferred oil payment facility given by Riyadh to $2.4 billion per year, according to finance minister Ishaq Dar.


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