Rupee weakens on black market amid dollar demand

KARACHI: Dollar rate increased significantly in the “parallel market” as importers sought the grey market to fulfill their forex needs, with particular increase in demand for greenback to smuggle into Afghanistan, dealers said.

According to Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan, dollar was being sold at 282-285 against the rupee in the grey market and at 270 to the rupee in the kerb market.

The price of a dollar was 290 in Peshawar’s illegal market. The rate in Afghanistan was quoted to be 295 rupees.

As the government and the exchange firms both removed a cap on the exchange rate late last month, the grey market was less lucrative. As a result, both the price and demand for the dollars decreased. But things have changed now.

“Grey market is once more operative. Many importers have begun securing dollars from the black market,” Paracha said.

“Importers are purchasing dollars from the black market since the government asked them to arrange dollars on their own and the banks slowed the processing of the letters of credit for the imports amid liquidity crunch,” he added.

In the interbank market, the dollar fell 0.37 percent to 260.93 against the rupee.

The spread between the interbank, open market and grey market has significantly widened. Now there is a 15 rupee difference between the open market and the black market. The difference between the black market and the interbank has grown to 24 rupees, according to Paracha.

He said that the exchange companies should be permitted by the government to manage foreign exchange for importers,

The forex reserves held by the central have fallen to $3.19 billion—enough to cover less than three weeks of imports.

Faisal Mamsa, Chief Executive of Tresmark said, “The grey market is a derivative of lack of forex liquidity, rather than driven by prices. To eliminate the grey market, the liquidity situation has to get better.”

The smuggling of US currency to Kabul by traders and smugglers has once more picked up steam, which is a significant issue for Pakistan that is already facing a severe cash shortage, Paracha noted.

Earlier this month, a foreign media outlet Bloomberg reported that traders or smugglers are bringing as much as $5 million into Afghanistan from across the border with Pakistan, providing some support for the country’s squeezed economy after the US and Europe denied the Taliban regime access to more than $9 billion in foreign reserves. As a result, the Taliban government imposed new limits on persons taking foreign cash out of Afghanistan.

“We worry that as the black market premium for the Pakistani rupee rises, it will not only alter market sentiment but also jeopardise formal channels for sending money back to Pakistani nationals who are working overseas,” Paracha added.

Growing optimism that an expected $700 million loan inflow from China would help stabilise the nation’s critically low foreign exchange reserves is one of the factors driving the rupee’s gain in the interbank market.

The government is hopeful that it is getting close to receiving a bailout from the International Monetary Fund after taking a number of measures, including tax increases to support its struggling economy.