The fear worked, at least in the short term. Open market currency rates, which were at 10 percent premium to interbank a few days ago, are now at a discount of 1 percent. Earlier, the interbank was moving up, as it was chasing the formal open market and that was chasing the informal open market. Now, the chase is still happening, but in the other direction, the formally open market is falling and the interbank is following it. However, the informal open market is missing in action.

This all started by the successive meeting of the Army Chief with the business community in Karachi and Lahore to restore confidence, as the currency was almost in free fall. Thereafter, the crackdown on smugglers and illegal currency dealers started and is very actively covered in the mainstream media. Then the rumors of demonetizing Rs5,000 note, scanning of bank lockers and what not kept on circulating.

The objective is to instill fear and compel the dollar holders to sell in the market. In the first phase currency dealers offloaded their own inventories. That has brought the open market to parity with the interbank. Then the importers came to sell as they were holding dollars for their future purchases as a hedge to PKR depreciation.

And because of these two, exchange companies are selling dollars to the interbank. This is pushing PKR to appreciate in the interbank as well. Seeing this now exporters are coming into the interbank market to sell, and importers are waiting for the rates to come down further. There is a flurry of dollars in the market, and SBP is smartly buying some to shore up its reserves.

That is the stock of the situation. The problem is for those who bought the dollars in the informal open market and are searching to sell. The market operators (B category exchange companies or any other dealers) are now underground. And A category exchange companies are not interested in buying from informal market due to fear of crackdown and then they would have a problem selling in the interbank.

Already formal exchange companies are buying cash dollars (in small chunks – less than $10k) at a discount from the interbank market, as when these sell cash in the interbank, they must pay a fee of 0.1-1.5 percent and then the bank buying has to take risk of carrying cash for a few days. That is why the open market is at a discount to the interbank.

The informal holders of dollars are sitting at a periphery with fear of law enforcement catching up and the fear of PKR strengthening further. Some of them may want to sell; but the question is how. But like anything there is a price for it. Just like informal was at steep premium to the interbank, there might be days when the informal market to be at a steep discount to the interbank. As at some rate, they may find buyers.

The dilemma for the policy makers and SBP is to how to bring that supply into the formal sector without perturbing the IMF if informal dollars which may run into tens or hundreds of million dollars. Let’s see how this cat and mouse game proceeds further.

Having said that there is no fundamental change in the macro landscape. The fear cannot be sustainedfor long. The optics of picking up smugglers and informal currency dealers would have short life. Smuggling and hundi hawala market is nothing new, It’s there since long and may remain till we live.

The corruption in smuggling of goods and currency is not possible without collusion of tax, law enforcing and border handling agencies. Are we talking about correcting these institutional arrangements? If so, be bullish on PKR – otherwise, the party is short lived.