KARACHI: Pakistan’s currency dealers decided to remove a self-imposed cap of Rs255 on open market exchange rate on Tuesday, clearing the way for further depreciation of national currency against the US dollar.
The rupee has been under pressure due to high demand for external payments amid declining foreign exchange reserves that stand at $4.6 billion, barely enough to cover three weeks of imports.
The low reserves have compelled the government to restrict procurement of goods from abroad, including industrial raw materials, to prevent the outflow of dollars. Meanwhile, the commercial banks have also stopped issuing letters of credit (LCs), leaving importers struggling to arrange the greenback for orders already in the pipeline.
The situation has led to the emergence of a black market of US dollars where the currency can sometimes be traded at rates as high as Rs270. Pakistani dealer said on Tuesday the removal of the exchange rate cap would end the illicit market and stabilize the national currency.
“The decision to remove the cap will eliminate artificial demand for US dollars by almost 90 percent since people have been buying them from open market at relatively low rates and selling at much higher prices in the black market,” Zafar Sultan Paracha, general secretary of the Exchange Companies Association of Pakistan (ECAP), told Arab News after holding a meeting to discuss the issue.
He said the actual conversion rate was Rs255 against the US dollar at which they were already selling the currency to local banks.
“When the market will open tomorrow [Wednesday] the exchange rate will either be Rs254 for buying and Rs257 for selling or Rs255 for buying and Rs258 for selling against the dollar,” Paracha said while indicating over six percent depreciation.
The rupee in the open market on Tuesday closed at Rs228.50 for buying and Rs240.75 for selling against the US dollar. The currency closed at Rs230.40 against the greenback in the interbank market.
The ECAP official hoped the removal of the cap would eliminate black marketing of US dollars, adding the measure would also help meet one of the demands of the International Monetary Fund (IMF).
“The move is in line with the IMF demand which also wants removal of artificial controls on the US dollar,” he added.
Another representative of currency dealers acknowledged the decision to maintain the cap on the exchange rate had not led to the desired results.
“We had decided to cap the exchange rate in national interest,” Malik Bostan, president of Forex Association of Pakistan, said in a statement. “We expected it would support the national currency but it proved that our decision was wrong.”
Bostan added the decision was made after taking central bank officials into confidence. He hoped the market mechanism would prevail, causing an adjustment in interbank rate as well.
Local currency dealers have also offered the government to facilitate LCs of up to $50,000 in a bid to share its burden.