As Pak-Afghan border closes, dollar loses value

US currency trades at two-month low; SBP’s cash margin requirement contributes

KARACHI: Demand for dollar has declined in the open market, resulting in the US currency shedding close to 1% in value against the Pakistani rupee over the last couple of weeks.

The decision of the State Bank of Pakistan (SBP) to impose 100% cash margin on import of certain consumer items and the closure of the Pak-Afghan border have resulted in lower demand for the greenback, according to currency dealers.



The US dollar is now trading at Rs106.75 in the open market.

“The demand for dollar in the open market came down to a two-month low on Wednesday,” said Forex Association of Pakistan (FAP) President Malik Bostan.

Currency dealers said the development is due to more than one reason. The Pak-Afghan border was shut in the last week of February following multiple terror-related incidents in Pakistan.

Officials blamed the entry of militants from the poorly-secured border area, ordering its closure for an indefinite period. However, the closure also resulted in hampering of trade activities.

Some currency dealers believe the demand as well as the value of the dollar in the open market comes down whenever Pak-Afghan border is closed for a long time. Thousands of people, especially traders, cross the boundary daily to purchase dollars from Pakistan that puts additional pressure on the rupee in the open market. On the other hand, the SBP-imposed 100% cash margin requirement also resulted in lack of demand for the US dollar.



The decision was meant to protect the country’s foreign exchange reserves for the “incremental import of growth-inducing capital goods”, according to the SBP.

“This regulatory measure would, interalia, discourage the import of these items and would have nominal impact on the general public,” stated the SBP release issued in February.

Bostan said the dollar had increased to a value of Rs109 in the open market in January before sliding the next month.

“The gap in the dollar rate in the interbank and the open market reached close to Rs4 by mid-January when the greenback was trading at around Rs109,” he said. “However, the situation has now changed.”

Currency dealers now expect the dollar to trade in the range of Rs106-107 in the coming weeks.

Previously, market sentiments had improved after a meeting between currency dealers and the SBP in the third week of January during which the central bank demanded commercial banks to immediately provide dollars to their foreign currency account holders because the delayed release was creating an impression of greenback shortage in the market.



Meanwhile, some sectors showed reservations on the SBP’s move because they believe it would increase the prices of imported items. However, the central bank believed it would have “nominal impact” on the general public.

Additionally, some currency dealers said that the central bank is getting the desired results because it is now difficult to import certain luxury items and it is being reflected in low demand of the dollars in the open market.

Over the past two years, International Monetary Fund has repeatedly said that Pakistan’s rupee is overvalued by 5%-20%. The rupee has been one of the best performing currencies in Asia for over three years despite the dollar’s sharp appreciation against other currencies.

Nevertheless, according to analysts, the artificial support of the rupee has adversely affected Pakistan’s exports over the two-year period. This is happening at a time when other countries have devalued their currencies to support exports.

Published in The Express Tribune, March 9^th, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.