As the country deals with political uncertainty, economic challenges, and external pressures, the currency market has been experiencing high volatility in recent months. The US dollar, the primary international reserve currency, has seen significant fluctuations versus the Pakistani rupee.
One of the main factors behind the rupee’s volatility is the imbalance between the supply and demand of foreign exchange in the interbank market, where banks trade currencies with each other. The interbank market is fed by inflows from remittances and exports, and drained by outflows for imports and debt payments. However, these inflows and outflows are not always synchronized, leading to periods of shortage or surplus of dollars.
Another factor that affects the rupee’s volatility is the gap between the interbank rate and the open market rate, where individuals and businesses buy and sell currencies through exchange companies. The open market rate is usually higher than the interbank rate, reflecting the premium that people are willing to pay for dollars in cash. However, this gap can widen or narrow depending on various factors, such as speculation, smuggling, hoarding, and regulations.
As the crackdown on smugglers and illegal money merchants began, the fear worked, at least in the short term. A few days ago, open market exchange rates were 10% higher than interbank rates; today, they are 1% lower.
The intention is to incite fear in the dollar holders so they will be forced to liquidate their currency. Currency traders sold out their own inventory in the initial period. As a result, the open market and the interbank are now almost equal. Exchange corporations are selling dollars to the interbank as a result of aforementioned factors which is helping the PKR to strengthen in the interbank market as well. The market is awash with dollars, and SBP is wisely acquiring some of them to bolster its reserves.
So it’s all hunky-dory, eh? Not really, since the macroeconomic factors have not fundamentally changed, the fear factor cannot sustain the currency market for long. Smuggling and the hundi hawala market are nothing new; they have existed for a long time and likely will for as long as we live. The real question is how the policy makers and SBP will bring the dollar supply into the formal sector?
The rupee’s volatility has significant implications for the country’s economy and society. A volatile rupee can create uncertainty and instability for businesses and consumers, affecting their confidence and decisions. Therefore, it is important for the country to maintain a stable and realistic exchange rate that reflects its economic fundamentals and external conditions. Without pursuing sound fiscal and monetary policies, enhancing foreign exchange reserves, diversifying export markets and products, this rupee’s appreciation is nothing but a mirage.
