There are multiple PKR-USD conversion rates that exist. There is an interbank rate, the rate which is controlled by the central bank through various means, at which different banks transact amongst...
There are multiple PKR-USD conversion rates that exist. There is an interbank rate, the rate which is controlled by the central bank through various means, at which different banks transact amongst each other, and conduct transactions. The stability in that rate is provided by the central bank, which can provide foreign currency liquidity as and when required, or shut things down, or use other not-so-subtle tactics to keep the market orderly. There is also an open market rate; this is the rate at which exchange companies buy and sell foreign currency to ordinary folk, against provision of various documentation, etc. In normal non-volatile times, the difference between the interbank rate, and the open market rate is a few rupees at best. However, during volatile times, the difference increases substantially, and in recent memory has widened to more than twenty rupees, or roughly seven per cent. The central bank can still instill some order in this market by controlling the supply and demand of foreign currency, and thereby tightening the spread (or the difference between the two rates). Availability of an open market rate does not guarantee availability of foreign currency at that rate. The rate may exist, but supply at that rate may not exist.
The marginal rate, or the price at which actual transactions happen, or at which supply may be available is essentially the ‘real’ open market rate for lack of a better word. The difference between this rate and the interbank rate has been as wide as thirty rupees, or roughly ten per cent in recent memory. Over the last few months, this ‘real’ open market rate has hovered between a premium of seven to ten percent. This is the rate at which supply of foreign currency is available, and this is the rate at which a lot of remittances have started flowing through the informal market.
The existence of three different rates, and significant spreads relative to the interbank rate suggests existence of a broken market. Such wide spreads imply that there is insufficient supply of foreign currency in the formal market, due to which availability can only be guaranteed at a higher rate. The recent announcement by the State Bank to move credit card settlements in foreign currency from open market to interbank alludes to this, such that demand in the open market can be reduced and the spread can be reduced. The spread has reduced to a certain extent – but the structural problem of there being a shortage of foreign currency continues to exist. Due to restricted supply of foreign currency, imports continue to be rationed, while import coverage for the country is close to its lowest point in two decades. This is a signal that suggests that foreign currency problems are far from over till we are able to arrange sufficient foreign currency to meet critical requirements, and are able to shore up our import coverage. Till the time that happens, we will continue to see volatility, wide spreads, and existence of multiple rates for the same currency.