PKR/USD has shown resistance at the 270 level in the interbank market. Yesterday, the PKR appreciated against USD after a sharp dip in a few trading sessions. Two-way movement is the game of any market. The closing of the USD at a lower level yesterday than the previous day is a good omen. That could bring some exporters to sell their holdings and remitters to speed up the flows. This in turn could improve PKR further in the interbank.
Once that happens for 2-3 days, there could be some selling pressure in the open market – already, the rate in Kabul is lower than that in Karachi – an indication of dollar correction in the black market. If the trend continues, there might be a case of open market trading below the interbank for a few days – a stark opposite to what was happening in the past few weeks.
However, the inherent assumption is the timely attainment of the Staff Level Agreement (SLA) with the IMF in a week or two. Otherwise, the risk of a downward slide continues. And nothing is certain about the IMF resumption. Keep a close eye on the news coming from talks with the Fund taking place in Islamabad.
And the lesson to learn for SBP is to not sway away from its stated policy of flexible and market-based exchange rates. Any step in the opposite direction can only be damaging. In the past, there were numerous examples where PKR had to adjust sharply – as it did happen in 2008 and multiple other times. A big damage Dar has caused is undoing the good things which were happening at SBP and turning it back into an administrative arm of Q-block.
Anyhow, if the IMF review is completed, the PKR may appreciate in the interbank market, and seeing that the flows in the open market may increase, adding further downward pressure. There are some technical aspects of exchange companies that SBP should look at. They have an issue with the supply of dollars. There are supplies coming in third currencies which they are exporting. However, they can import back dollars against these currencies. And they cannot sell third currencies to the interbank markets as banks only buy dollars, and dollar supply is restricted due to its import ban. This must be corrected to improve the supply of exchange companies and to make a dent in the black market.
If these issues are sorted, the rate of exchange companies may come close to the interbank and there may be a few days when these trade below the level of the interbank rate. In this manner, exchange companies can surrender excess dollars in the interbank market to improve flows in the interbank and shore up reserves or lower the gap between pending imports and payments.
Let’s see whether this is addressed. All eyes are on the ongoing IMF negotiations.
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