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Swelling rate gap stirs talk of big devaluation

Swelling rate gap stirs talk of big devaluation

KARACHI: The exchange rate difference between open and interbank markets on Wednesday swelled to Rs22 per US dollar, strengthening speculations about another big devaluation of the local currency.

On Jan 26, the exchange rate was uncapped and the rupee witnessed the largest single-day fall in over two decades. It lost 9.6 per cent, or Rs25 per dollar, to close at Rs255 the same day. The aim was to meet the IMF demand for market-based exchange rate.

However, the dollar remained almost unchanged in the interbank market (PKR gained two paise) on Wednesday, but the open market rate reached as high as Rs312.

The Exchange Companies Association of Pakistan (ECAP) reported the dollar’s closing rate as Rs309, compared to Rs287.13 in the inter-bank reported by the State Bank.

The difference between the two markets reached Rs22 per dollar, making it harder for the State Bank to maintain the current banking rate. The negative impact of this rate resulted in the decline of remittances, which fell by 29 per cent last month and 13 per cent during the first 10 months of the current fiscal year.

According to experts, a difference of Rs22 per dollar could presage another big devaluation of the rupee.

“At least three major reasons are there for the unexpectedly high price of dollar in the open market. “First, inflows have dried up; second, banks are not providing cash dollars to account holders and exchange companies; and, finally, the deteriorating political situation has kept currency holders from selling in the market,” said Zafar Paracha, the ECAP general secretary.

He said trading in the open market had shrunk to just 20 per cent of the normal volume, with most of the clients being buyers.

Most Pakistanis who have foreign currencies are refraining from selling them due to fluctuations in the exchange rate, Mr Paracha added.

Big devaluation

He did not rule out the possibility of a large devaluation of the rupee to bring the inter-bank rate closer to open market rates.

“A big reason for this wide difference is that importers have been allowed to arrange dollars for their imports. It virtually encouraged the grey market to stay strong with increasing dollar prices.

“Now the grey market is offering the greenback at Rs320-322 per dollar,” said Mr Paracha.

Currency experts and analysts believe that due to the worsening political situation, the IMF is reluctant to extend loans to Pakistan. The lender’s reluctance is the cause of more uncertainty for the financial market while it is making the local currency weaker.

Reports appearing in the media suggest that economic growth would be negative for FY23, a shocker for a country already facing a default threat on the external front.

Published in Dawn, May 25th, 2023

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