ISLAMABAD: Pakistani financial analysts and experts on Wednesday said the government’s crackdown against currency hoarders and smugglers has caused the rupee to make gains against the US dollar in the open market, calling for reforms to ensure a sustained exchange rate. 

Pakistan’s rupee strengthened by Rs4.88 percent against the US dollar in the open market over the last three days. The development is an interesting one as the currency has considerably depreciated in value against the US dollar ever since the caretaker administration of Prime Minister Anwaar-ul-Haq Kakar took over the reins of the country last month.

Smuggling of US dollars to neighboring Afghanistan and an increased demand for the greenback in Pakistan due to import payments has led to a shortage of dollars in the South Asian country, driving inflation in a country already reeling from an economic crisis. 

The appreciation of the rupee in the open market, however, takes place days after Pakistan’s army chief General Syed Asim Munir met leading business figures in Lahore and Karachi last week. The army chief assured the business community of fostering “transparency” in the dollar exchange and interbank rates.

According to the Exchange Companies Association of Pakistan (ECAP), the exchange rate gap with the interbank rate narrowed as the dollar depreciated from Rs328 on Monday to Rs312 on Wednesday, falling by Rs16 in the last three days. In the interbank market, the rupee closed at 306.98 against the greenback on Wednesday. 

“The recent appreciation of the rupee against the US dollar is [as a] result of the government’s crackdown against exchange companies involved in hoarding and black marketing of the greenback,” Syed Atif Zafar, chief economist at Pakistani brokerage house Topline Securities, told Arab News. 

Zafar said the exchange rate difference between the open market and interbank market has shrunk to 0.8 percent from 8.5 percent. 

“It is yet to be seen if the current exchange rate in the open market will be sustainable because if the dollar inflows don’t improve, the pressure on the rupee will ultimately increase,” he said. 

In July, the International Monetary Fund (IMF) approved a crucial $3 billion bailout for cash-starved Pakistan. One of the foremost conditions of the loan was that Pakistan would maintain the exchange rate difference at 1.25 percent during the five working days of the week. 

Baqar Jafri, chief executive officer of the stock market education platform ‘Investors Lounge,’ said the smuggling of US dollars from Pakistan has halted after the government-led crackdown against currency smugglers.

Jafri said the central bank must ensure further reforms to make sure the exchange rate remains sustainable. 

“We are left with no option but to make this exchange rate sustainable, otherwise we are heading toward debt default with a high degree of probability,” Jafri told Arab News. 

Karachi-based senior economist AAH Soomro said speculation in the exchange rate market had also stopped after the crackdown. 

“This is a good sign for the economy,” he told Arab News. 

Meanwhile, Pakistan’s central bank introduced structural reforms in the exchange companies’ sector on Wednesday. As part of the new reforms, the central bank asked Pakistan’s leading banks actively engaged in the business of foreign exchange to establish wholly owned exchange companies to cater to “legitimate foreign exchange needs of the general public.” 

The State Bank of Pakistan (SBP) said various existing exchange companies would be consolidated into a single category of exchange companies and the minimum capital requirement for them has been increased from Rs200 million to Rs500 million.

Exchange companies under category ‘B’ have been given a three-month deadline to improve their services or else have their licenses canceled. 

“The reforms have been introduced to provide better services to the general public and bring transparency and competitiveness in the Exchange Companies’ sector,” the SBP said. 

Zafar said the reforms would lead to a consolidation of the exchange companies, adding that it would also facilitate authorities in monitoring them. 

“The state bank should ensure that the measure should not lead to a monopoly of certain companies in the field,” he added.