The news media across the country is currently ripe with phrases like default risk, dollar shortage, and balance of payment crisis. Yet, the interbank rate of the greenback tells a different story, a misleading one indeed - that Pakistani rupee, over the last week, has relatively been stable against the dollar.
However, the reality is that the country is just hanging by the thread when it comes to meeting the dollar demand. The import cover has been reduced to just over a month and the foreign exchange reserves are at their lowest point since 2019. Further, a shortage of currency in the open market has given rise to a parallel market which is accelerating the exodus of the dollar from the country.
The interbank rate is currently around Rs225 while the open market rate stood at Rs231.70 for buying and Rs234 for selling on December 16, 2022. The spread has widened to Rs7 to 9 which in itself is an indication of volatility.
However, a key feature of this crisis, the “Black Market” for the dollar, is booming with transactions taking place at rates as high as Rs250.
The government, on the other hand, is pulling out all the stops to curb the dollar demand and preserve the forex reserves.
Those seeking the greenback are being made to prove the genuineness of their need by presenting documents like visas, passports, and air tickets. The amount of foreign currency that foreign-bound travellers can carry with them is also restricted to $5,000 per visit. The State Bank of Pakistan has also imposed an annual transaction ceiling of $30,000 for credit/debit card transactions per user. Another measure in the series of attempts to shield the foreign reserves was that of suspending in-app purchases through telecom companies.
“Pakistan’s consumption and production patterns are unsustainable. Almost 94 percent of GDP is based on consumption. While the export share is around 7 percent which should be 15-30 percent if regional economies are to be used as a benchmark. Therefore, consumption is import driven which is financed through dollars, the demand for which is bridged through borrowing,” Sakib Sherani, senior economist, stated in an interview.
What makes the situation even worse is the fact that the government is actively intervening in the market and trying to maintain an overvalued currency which is further exhausting the reserves.
However, the recent shortage can partly be attributed to the flare in demand as international travel resumes post-Covid. Additionally, the second half of the year is usually the time when students depart for foreign universities and the dollar is high in demand.
Amidst all the political uncertainty and currency volatility; companies, exporters and individuals are also holding back their remittances while some are buying up the dollar for speculative gains and safeguarding their savings.
Those sending in the remittances prefer unofficial channels of Hundi and Hawala, which explains why the official figures show a decline in remittances.
Yet, one of the biggest drains on whatever reserve of dollars that are left in the country, is the smuggling to Afghanistan. “We have a highly porous border with Afghanistan and smuggling of currency and goods is nothing new due to weak border controls. However, since the Taliban has come to power, the situation has aggravated. They [Taliban] have been shut out of the global financial system, therefore, have resorted to the Pakistani market for their dollar needs,” said Dr Ikramul Haq, a senior lawyer and adjunct faculty at LUMS.
While in the long run, the only workable solution is through reforms, the need of the hour is for the government to tighten its control to reduce currency leakage from the system and to expedite the progress with the IMF and reach out to bilateral partners.
“The short-term remedy for this crisis is same as it has been for the last 25 years. The government would need to rely on foreign aid and bilateral support. Therefore, as the situation has escalated to this point, the Pakistan government would need to use all levers of power that it has with countries from whom support is sought,” Khurram Husain, senior business and economy journalist, said in a recent interview.
However, the reality is that the country is just hanging by the thread when it comes to meeting the dollar demand. The import cover has been reduced to just over a month and the foreign exchange reserves are at their lowest point since 2019. Further, a shortage of currency in the open market has given rise to a parallel market which is accelerating the exodus of the dollar from the country.
The interbank rate is currently around Rs225 while the open market rate stood at Rs231.70 for buying and Rs234 for selling on December 16, 2022. The spread has widened to Rs7 to 9 which in itself is an indication of volatility.
However, a key feature of this crisis, the “Black Market” for the dollar, is booming with transactions taking place at rates as high as Rs250.
The government, on the other hand, is pulling out all the stops to curb the dollar demand and preserve the forex reserves.
What makes the situation even worse is the fact that the government is actively intervening in the market and trying to maintain an overvalued currency which is further exhausting the reserves.
Those seeking the greenback are being made to prove the genuineness of their need by presenting documents like visas, passports, and air tickets. The amount of foreign currency that foreign-bound travellers can carry with them is also restricted to $5,000 per visit. The State Bank of Pakistan has also imposed an annual transaction ceiling of $30,000 for credit/debit card transactions per user. Another measure in the series of attempts to shield the foreign reserves was that of suspending in-app purchases through telecom companies.
“Pakistan’s consumption and production patterns are unsustainable. Almost 94 percent of GDP is based on consumption. While the export share is around 7 percent which should be 15-30 percent if regional economies are to be used as a benchmark. Therefore, consumption is import driven which is financed through dollars, the demand for which is bridged through borrowing,” Sakib Sherani, senior economist, stated in an interview.
What makes the situation even worse is the fact that the government is actively intervening in the market and trying to maintain an overvalued currency which is further exhausting the reserves.
However, the recent shortage can partly be attributed to the flare in demand as international travel resumes post-Covid. Additionally, the second half of the year is usually the time when students depart for foreign universities and the dollar is high in demand.
Amidst all the political uncertainty and currency volatility; companies, exporters and individuals are also holding back their remittances while some are buying up the dollar for speculative gains and safeguarding their savings.
Those sending in the remittances prefer unofficial channels of Hundi and Hawala, which explains why the official figures show a decline in remittances.
Yet, one of the biggest drains on whatever reserve of dollars that are left in the country, is the smuggling to Afghanistan. “We have a highly porous border with Afghanistan and smuggling of currency and goods is nothing new due to weak border controls. However, since the Taliban has come to power, the situation has aggravated. They [Taliban] have been shut out of the global financial system, therefore, have resorted to the Pakistani market for their dollar needs,” said Dr Ikramul Haq, a senior lawyer and adjunct faculty at LUMS.
While in the long run, the only workable solution is through reforms, the need of the hour is for the government to tighten its control to reduce currency leakage from the system and to expedite the progress with the IMF and reach out to bilateral partners.
“The short-term remedy for this crisis is same as it has been for the last 25 years. The government would need to rely on foreign aid and bilateral support. Therefore, as the situation has escalated to this point, the Pakistan government would need to use all levers of power that it has with countries from whom support is sought,” Khurram Husain, senior business and economy journalist, said in a recent interview.