Cap on currency value to be removed
Controlling the rupee-dollar exchange rate has made imports cheaper, putting export earnings at risk of slippage; a situation that may lead to widening of fiscal and current account deficits in the future. photo: file
Currency dealers have unanimously decided to stop keeping the rupee overvalued artificially against the US dollar at the open market and have said they will let the rupee-dollar exchange depreciate to its actual value with effect from Wednesday.
Speculations suggest that the rupee in the open market could rapidly devalue to the level of the black currency market i.e., Rs250-260/$ within a couple of days. The open market dealers had artificially maintained the rupee-dollar exchange at Rs238/$ until Tuesday.
After chairing a zoom meeting on Tuesday, Exchange Companies Association of Pakistan (ECAP) President, Malik Bostan said, “The Association has decided to remove the cap on the rupee-dollar exchange rate with effect from Wednesday (January 25).”
“The move will help eliminate black currency markets, increase the flow of foreign currencies to the dealers and will be available to the public for international traveling, education and hospital fees.”
He said that the dealers had voluntarily decided to cap the exchange rate for national interest. The decision, however, resulted in creating a black currency market that appeared more damaging to the nation.
“People are buying dollars from the open market (at Rs238) and selling them in the black market (at Rs250-260), making it a business to mint profit,” he said, adding that no one was coming to the dealers’ counters to sell foreign currency which has dried up supplies in the formal market.
The rupee is expected to slump in the open market amid the country’s foreign reserves depleting to a less than three-week import cover at $4.1 billion.
ECAP General Secretary Zafar Paracha said “The decision to remove the cap on the exchange rate will bring the foreign currency inflows back into the formal system and help eliminate the illegal market.”
“The availability of market-based currency rates to individual buyers and sellers will convince them to return to open market counters. This will automatically crash the illegal markets as people feel safe working with legal entities,” he said.
Historically, the open market used to follow the rupee-dollar exchange rate in the interbank market. They used to sell US dollars at a premium of Rs1-2 on the interbank rate. During the Covid-19 pandemic, however, the interbank market mostly followed the open market.
Since Finance Minister Ishaq Dar’s return in September 2022, however, both markets have been following their own exchange rates.
Earlier, the International Monetary Fund (IMF) demanded the government end its control over the rupee-dollar exchange rate in the interbank market and let market forces determine the rate considering the demand and supply of US dollars in the system.
The local currency closed at Rs230.40 against the greenback at the interbank market on the day compared to Rs230.15 on Monday, according to the State Bank of Pakistan (SBP).
The government has accepted the IMF’s condition to resume the stalled loan programme. Accordingly, the domestic currency is projected to drop to Rs250-260/$ at the interbank market as well.
Technically, Pakistan is running three currency markets at the moment – the interbank, open market, and black currency market – with all three offering different rates.
On Monday, SBP Governor Jameel Ahmed said “The central bank has completed the investigation against 13 commercial banks allegedly involved in the rupee-dollar parity manipulation,” adding that, “SBP is all set to take action against them in a day (instead of weeks and months)”.
“The action could be fiscal or regulatory one,” he said. Banks earned Rs100 billion on currency exchange business from January to September 2022, said Ahmad.
Bostan further said that the currency dealers are scheduled to meet the SBP Deputy Governor Inayat Hussain. “We have informed him (Hussain) that the decision to cap the currency has negatively impacted the country under a fast-changing economic situation.” He, however, claimed that the removal of the cap will help strengthen the rupee-dollar exchange rate instead of weakening it in the near future.
Published in The Express Tribune, January 25th, 2023.
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