Countries like Pakistan cannot imagine an economy without dollars, but things are rapidly moving in that direction and policy makers seem helpless or just waiting for the economy to default. This was the heart of the FX sentiment on Friday.
The Governor of the State Bank of Pakistan (SBP), while assuring the nation that the problem is exaggerated, said the dollar outflows have emptied the central bank’s wallet. On July 22 alone, $754 million flew out of the SBP reserves and the total fell further to $8.57 billion, which is only enough for five weeks of imports.
July turned out to be the worst month of the new fiscal year (FY23) for the local currency as it lost 14.14% in value against the US Dollar. The rupiah has lost 26.26% over the calendar year and 36.38% since May last year.
More importantly, the calculations are based on the official dollar rates reported by the State Bank, but the actual rates are much higher than those reported.
Greenbacks are trading at an “astronomical level” on the open market; LCs are opened at a rate “above” the rate notified by the SBP
Presenter Kamran Khan in an “SOS tweet” reported that Pakistan State Oil (PSO) had withdrawn a letter of credit (LC) of $64 million at the rate of Rs248 through the National Bank of Pakistan. It should be taken as the official rate for the dollar, while the price reported by the SBP was 239.94 rupees on Thursday.
Importers complain that banks are charging an even higher price for dollars, as the shortage has created more space to make a profit on every dollar.
Former SBP Governor Reza Baqir was determined to intervene in the exchange rate if the situation got out of hand. It was stated when the exchange rate was left at the mercy of the market. The free exchange rate was managed to some extent during the previous governor’s term, but the new government, under pressure from the IMF, was not ready to touch the exchange rate.
“I don’t have official information, but our foreign exchange market estimates that the government has assured the IMF of a rate of Rs250 per dollar, which could increase further to Rs275,” said Atif Ahmed, a forex trader with a 25 years experience in the interbank market.
He said the State Bank was selling $20-25 million daily in the interbank market and keeping the dollar rate at the desired level, but failed to support the local currency. The central bank usually provides $50,000 to an importer who must manage the rest for import needs. Only a few importers receive one or two million dollars for imports, Mr. Ahmed said.
“Imports in July will surely drop. This will affect government revenue from import duties,” he said.
Banks are allowed to manage and sell dollars at rates that suit them. “With the Rupee crisis spiraling out of control, the risk of a wider and more damaging crisis through inflation, factory closures, unemployment, law and order situation has increased.
Time is running out for targeted intervention in the currency market,” said Komal Mansoor, head of research at Tresmark, a web terminal for financial markets.
The dollar practically crushed the local currency. A more than 36% appreciation of the dollar since May 2021 has flooded the economy with high inflation. The government and the State Bank have warned of rising inflation in FY23.
For the first time after 15 days, the dollar edged down 57 paisa to Rs239.37 on Friday. It was surprising for the market, but some forex brokers said that importers have stopped opening LCs for the time being due to the frequent appreciation of the dollar against the rupee.
The open market has sold 95% of their dollars to the banks, but in the last three days that process has stalled.
“Over the past three days, we have not been able to sell dollars to the banks as the Punjab and Peshawar ‘smugglers’ were extremely active and most of the gray market dollars were smuggled into Afghanistan” , said Zafar Paracha, secretary general of the Association of Exchange Companies of Pakistan.
The dollar was sold at 246 rupees on the open market, while the “grey market” offered 255 rupees because the dollar was 260 rupees in Afghanistan.
“I issued a press statement on Thursday asking the competent authority to stop this smuggling of millions of dollars. Today I feel that a positive result has come out of it,” Mr. Paracha said. .
He said the situation was alarming for the economy and the country, and the government, the State Bank and all stakeholders should give their full attention to solving the problem.
Posted in Dawn, July 30, 2022