Rupee keeps falling in black market despite cap removal by forex firms

KARACHI: The gap between the open market rate of the rupee against the dollar and the price on the black market widened further on Wednesday, despite money exchange companies letting the currency drop after removing an unofficial cap on the dollar-rupee rate.

The rupee weakened 1.2 percent to close at 243 to the dollar in the open market trade on Wednesday. The black market traders raised their rates to a range of 260-270 per dollar.

Traders said rupee was quoted at 252.5 to the dollar in early trade, but regained much of its value after the central bank assured that banks would provide dollars to currency dealers.

In the interbank market, the rupee depreciated 0.49 rupees or 0.21 percent against the dollar.

A black market for dollars has sucked up liquidity from the interbank and kerb markets while the government kept the rupee artificially strong and curbed imports to limit outflow of foreign reserves. Pakistan, which relies heavily on imports, is facing a severe shortage in foreign currency inflows for a host of reasons, including political uncertainty, causing the country’s official reserves to tumble to $4.6 billion. Foreign currency dealers on Tuesday removed an unofficial floor on exchange rates to rebalance currency markets following months of turbulence, eying rupee/dollar parity 255 to 256 levels.

But the move failed to dent dollar rates in black market.

“The black market rate is still sticky in the range of 260-270. The decision of exchange companies has not had any impact as such,” said analyst Fahad Rauf at Ismail Iqbal Securities.

Rauf said exchange companies have become irrelevant in the face of the growing black market.

“The government and central bank need to fasten the pace of the release of currency controls otherwise the black market will continue to thrive.”

Market sources said the central bank has “verbally instructed the forex companies to prevent a significant depreciation in rupee value”.

The Exchange Companies Association of Pakistan (ECAP), however, denied any verbal instruction from the State Bank of Pakistan (SBP) “to maintain the rupee’s ceiling or support its value”.

“The deputy governor of the SBP, Dr Inayat Hussain, instructed banks to provide dollars to the forex firms in a meeting with the ECAP. This will help increase dollar liquidity in the market,” said Zafar Paracha, secretary general of ECAP. “The exchange companies decided to close the currency by depreciating it by 2.25 rupees.”

The ECAP President Malik Bostan said the removal of the cap would curb black market trade, though it would take time to bridge the gap.

Bostan said the central bank had given an assurance at a meeting that commercial banks would be instructed to supply exchange companies with dollars within a week.

“We’re facing a shortage. We do not have physical dollars,” Bostan said. “People aren’t selling dollars. They’re only buying.”