Banks have started settling international transactions through the open market since the State Bank of Pakistan (SBP) isn’t releasing any dollars and the market still has to balance itself.
The central bank ‘reiterates’ its stance that the PKR is valued at 227-228 against the USD. Out on the streets, that rate has eclipsed 265 and touched levels as high as 275.
While artificial currency controls are a nice trick to suppress the screams of the economy, they have unintentionally allowed black markets to thrive and almost emptied state coffers.
An open market-determined payment system paves the way for inflation to keep going higher and hence it is important to bring aggregate currency supply into better balance and thereby reduce inflationary pressures.
Independent economic analyst A H H Soomro told ProPakistani,
Banks have no choice now but to settle at an open market rate. There are no dollars being shed by SBP so the open market has to balance itself. It will eventually push the interbank rate somewhere in the middle. There will be another layer of 10 to 15% inflation across the board very soon. We have boxed ourselves in now and only a fresh government can give a roadmap.
Since July 2022, Pakistan has heavily meddled in foreign exchange markets in order to contain volatility and, possibly, to reduce appreciation pressures in major currencies. While it paused once or twice to indicate exchange rate flexibility, there were consequences in terms of real economic drawbacks which have now been realized, such as commodities that moved up a tier into the realm of real value assets. These include cars, real estate, and smartphones.
In this regard, a private equities broker told ProPakistani,
We have yet to see what Dar sees as a significant shift in emphasis toward reducing risks to the economy, but allowing banks to charge open market rates is the wrong way to go. With its current pace, the PKR will hit Zimbabwean levels as early as August FY24.
Regarding banks playing with open rates, she said, “Banks will make the process more difficult this year. They’ll make it a sweet practice to buy dollars on the open market to settle transactions because the rate is higher and SBP doesn’t touch it, nor does it plan on regulating the space any time soon”.
Alleviating forex liquidity has been a challenge for the government as it attempts to achieve this objective by limiting exchange rate volatility rather than by setting a path for the exchange rate level. While Ishaq Dar’s finance team is scrambling for external support, markets are signaling toward elections and a fresh mandate to revive the economy.
In any case, artificial controls will only drive inflation upwards and make lives more difficult for almost 230 million people living in Pakistan.
