Is Dar's honeymoon short-lived? The currency is coming under pressure again. PKR had stopped appreciating against the USD in the last week. And this week started with some pressure. The gap between the interbank and formal exchange market is growing again – currently, the gap is around Rs5 against one USD. This is not a good omen. The open market participants are searching for Dar and his magic wand while the FM is taking stock of the party position in London on his way back from Washington, where he got the reality check.

The currency was in an oversold region (for the lack of a better word) when the news of Dar's reentry came. And it started appreciating as exporters started selling in forward, and remitters hurried with the inflows to get the best price. However, the exporters lost interest, with PKR/USD returning from 240 to 220. The selling lost its steam, and remitters stopped showing urgency.

The last week was dull. There was no real movement, and the sentiment was neither bullish nor bearish. However, the week ended with not some good news for the flows. First, the market participants got jittery at the unexpected remarks by US President Biden on Pakistan. Then the PTI's landslide victory in the by-elections raises questions on the current coalition's longevity as people are seeing the bleak future of PMLN. All these are weakening Dar's writ. Plus, he has nothing exciting to offer from his trip to Washington. So let's see what he can bring from London.

Nonetheless, the reality is that the fundamentals are driving the currency market. So Dar has to do more than give macho-style warnings to exchange companies and banks. He has to show some substance. One low-hanging fruit is to correct the open market and lacunas in trade with Afghanistan.

Since the Taliban took over Afghanistan, PKR has been under pressure against the USD. Of course, there are other reasons, such as global recessionary fears, USD strengthening, bad economic decisions by successive governments, and political uncertainty at home. However, one cannot rule out the Afghanistan factor. The short story is that Afghanistan's central bank's dollar accounts are frozen, relying on Pakistan for their trade needs. The mechanics are as follows.

The trade between the countries is on cash basis in PKR. However, no one in Afghanistan wants to hold PKR, and whatever we import from Afghanistan is being settled in USD bought from the open market in Pakistan. So then the exports from Pakistan to Afghanistan (in essence) are settled in PKR while the exporter from Pakistan is primarily importing that stuff (such as palm oil) in USD. So the importer from Afghanistan buys dollars from the open market and sells to the Pakistani exporter to show in the exporting document. But in essence, the deal was in PKR.

In both cases of import and export to Afghanistan, conversion of PKR into USD is taking place in the open market. That is putting constant pressure on the currency in the open market. And that is pushing the interbank rate down. So the supply from exchange companies to the interbank market is almost wiped out. And that is hurting formal remittances. Not every dollar needed for Afghan trade can be secured locally. Some have to be settled through Hundi/Hawala against remittances inflow. That phenomenon explains the fall in remittances in the last few months. Then the higher gap between the open and interbank markets incentivizes remitters to send money through illegal channels to get the best rates.

The growing gap between open and interbank markets has been catalyzed by floods as Pakistan imports/smuggling have increased from Afghanistan and Iran. A better strategy could be to open trade with India to reduce the trade requirement from informal neighbors- Iran and Afghanistan and to move the Pak-Afghanistan trade from cash to a banking channel.

All these steps would help. But the real gain could come from expected inflows from multilateral and friends, as promised. The market is getting jittery with the weakening coalition government. These need to be expedited. And the current account has to be brought under control, while the backlog of payments needs to be addressed. Isn't this asking for too much? If so, don't expect PKR to appreciate and sustain.