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All eyes were on the open market of foreign currency on Wednesday after the Exchange Companies (ECs) lifted what they called a self-imposed price cap. In simpler words, they said they were going to let demand-and-supply dynamics do the talking and not issue what were meaningless buying/selling rates in the absence of trading volume.

The move, they said, was meant to ensure availability of foreign currency after customers had been lured towards the ‘black market’ that offered higher premiums.

What transpired on Wednesday?

At the start of trading, the Pakistani rupee reportedly fell significantly in the open market, hitting levels close to Rs250 per USD. However, as the day progressed, customers struggled to get their hands on the greenback, Business Recorder found.

Soon after, ECs issued a rate that said they would buy dollars at Rs240.60, and offer them at Rs243. Such a quick recovery raised eyebrows as the market suspected that some sort of intervention had taken place.

‘Shortage’ of dollars persists

The on-ground situation, Business Recorder found, was that dollars continued to be scarce in supply for customers approaching the exchange companies.

Three different ECs in Karachi were visited, but all of them said there was a shortage. Other foreign currencies including UAE Dirhams were also not available. One exchange company said it had Saudi Riyal available for sale, and sold it to a customer at Rs68.5.

One currency dealer, on condition of anonymity, said exchange companies have not been allowed by the government to remove the cap.

“If the government had allowed ECs to actually remove the cap, there would have been dollars available for sale by now,” the dealer said.

Another currency dealer said trades would continue to take place in the black/grey market if the cap is not removed.

“Exchange companies wanted a price of Rs253 but the government didn’t allow it,” said a dealer.

However, ECAP officials on record denied that there was any such direction from the government or the SBP.

“Who would want to lose their money? Dollar will remain short unless it is sold at market price,” the dealer added.

ECs lift cap on dollar rate

Talking to Business Recorder on Wednesday, Zafar Paracha, the ECAP General Secretary, said officials at the State Bank of Pakistan (SBP) conveyed that banks would provide the dollars to ECs and accountholders.

“We had a meeting with SBP officials today, under which different issues were raised, especially pertaining to the shortage of dollars,” said Paracha after the meeting with SBP officials.

“The SBP has told us that it would direct banks to provide the liquidity.”

Paracha speculated the dollar rate is expected to rise in the open market, apparently implying that the rupee would inch closer to the rates prevailing in the ‘black’ market.

“The dollar rate remains very high in the grey market. The increase in rates (in the open market) would help reduce the black market’s size,” he shared.

Paracha said authorities should allow ECs to provide dollars to importers. “We can provide $200-250 million to importers on a monthly basis,” he said.

Three different, simultaneous markets with a widening gap

Pakistan is currently witnessing a massive volume of foreign currency changing hands in the unrecognised informal ‘black/grey’ market, instead of the open market.

The reason: the dollars there are available, and because they are being traded at what experts say is a fairer reflection of the rupee value. The price-cap, which ECs had set, was putting the rupee at such a tight leash that no one wanted to sell dollars at that level, experts add.

The third market is the inter-bank: where the rupee depreciated for the 26th straight session against the USD on Wednesday. However, many believe this market too, is not reflecting the true value of the rupee in the face of massive economic distress in Pakistan.

All three markets have existed in Pakistan, but of late, the gap has considerably widened among them.

The inter-bank rate for the US dollar has hovered around 230, the open-market’s has been around 240, but the grey/black market (where trades are actually taking place) has seen exchanges happen in the range of 250-270 (official rates are obviously not available so Business Recorder has relied on customers’ accounts).

Recently, SBP Governor Jameel Ahmad also admitted that the grey market for foreign exchange is thriving because of speculators.

However, he remained confident that the issue would be resolved after inflows materialise.

“They are illegal operators. We don’t recognise them. We are cooperating with law enforcement agencies to curb it,” Ahmad had said on Monday.

Pakistan is currently battling to meet its external financing obligations amid rapidly dwindling foreign exchange reserves that are barely enough to cover a month of imports.

It is also struggling due to decades-high inflation which policymakers are trying to curb with massive interest rate hikes.

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