With Dar at the helm, the currency is artificially controlled. This time the modus operandi is different. In 2013-17, the SBP was the lender—the dollar supplier of the last resort. Now it has become the effective broker of the last resort. Since there is no dollar to supply in the market to keep the exchange rate in check, SBP is ensuring import-heavy banks have supply from exports/remittances-heavy banks at the prevailing rate. And the gap in demand-supply is being managed by controlling supply.

However, markets are not really buying the strategy. There is a growing difference between interbank and open market rates. There are several informal exchange rates with none close to the interbank rate. The growing difference in rates is exacerbating the situation. Increasingly, remittances are moving towards the informal hundi hawala market, and the exporters are holding back payments. This is making SBP impose further informal constraints on imports. Without correcting the interbank rate, the market would explode. The IMF is also pushing for a market-based rate.

The question is what would be the market rate? And what would be its implications? First, the policymakers need to realize that the more time they keep the interbank rate suppressed, the higher the decline would be once it is reverted to market-based. The reasons are simple and intuitive.

There is a secular decline in the inflows from the official channels due to this practice. Regular remitters can get any rate of 245-250 going in the open market or using the hundi hawala system to remit. While the interbank rate is 225. Who would like to lose Rs25,000 on a $1,000 conversion? Usually, these informal flows net off into the interbank market through supply from exchange companies. Or these are settled through informal imports where partial (or full) payment is not routed through official imports. The impact on the current account is neutral with implications on the fiscal side in terms of forgone tax revenues.

However, with the growing difference in rates and deteriorating external imbalance situation, there is a rush in the open market to buy dollars for hoarding purposes. That is taking the supply of informal remittances which used to fall in the interbank market or being netted against imports. The other issue is exporters keeping flows outside as much as they can to gain on any potential depreciation. Banking channel checks confirm that remittances are down by 10-12 percent from the November number and exports dip is even higher – at 15-20 percent.

This madness must end. Currency must be left for the market to adjust while keeping SBP’s stated policy of curbing volatility. SBP must exercise its independence. And the monetary policy should think from the perspective of enhancing savings in PKR and work on correcting inflation expectations. If there is room for a rate hike, the monetary policy should not shy from doing the needful.

Once the currency moves towards its natural direction, there would be a conversion of remittances to formal flows and exporters to bring back the money. There would be appreciated in the open market and both interbank and open market rates to converge to equilibrium. The Sooner it is done, the better it will be.