The recent volatility in the open currency market had its roots not in the shortage of non-dollar foreign currencies but in the behaviour of foreign exchange companies, inquiries reveal.

Though, at the peak of the crisis, the rupee that had fallen to near Rs110 per dollar for customer buying in the open market, it has now bounced back (rising to Rs107.20 on Dec 8) although the gap between interbank and open market currency has yet to be narrowed.

On Dec 8, the gap was in excess of 2pc, against the ideal 0.5-1.0pc, as in the interbank market the rupee was trading at Rs104.76 and Rs104.77 for buying and selling.

Insiders say the recent crisis surfaced when smugglers of non-dollar foreign currencies refused to accept ‘book entries’ and instead demanded cash payments against their sales

Central bankers point out that the ability of currency speculators and smugglers to jolt the exchange rate has noticeably weakened.

“Immediately after a crisis surfaces, we stem it sooner than later,” says a senior central banker adding that it is the third straight year that the attempts to destabilise the rupee have lost momentum both in frequency and in strength. But he admits that the difference between the open and inter-bank exchange rates remains too big and ‘has to be brought down’.

Central bankers say ideally the gap between the two exchange rates should be kept at 0.5-1.0pc.

They say that exchange companies have been told to keep this point in mind, and claim that by the time this write-up is published further gain in rupee value in the open market should reduce the gap between the interbank and open forex market.

In the past three years, the SBP has made reporting requirements for forex firms more stringent and improved its on-site and off-site inspections.

Insiders say the recent crisis surfaced when politically-powerful currency smugglers and hoarders of non-dollar foreign currencies refused to accept ‘book entries’ at some leading forex firms and, instead, demanded cash payments against the sales of these currencies.

“At least two forex firms declined to buy a huge stock of the pound sterling and euro from hoarders, upon which the sale of these currencies in the open market went down,” explained an industry insider.

Besides, currency speculators who normally sell the greenback to these two and other forex firms at lower-than-advertised rates (to whiten their money) also stopped their sales. Perhaps, they had found ways of smuggling dollars out of the country on their own.

Left with a shallow supply of non-dollar foreign currencies, (or third currencies in forex dealers’ parlance) forex companies that normally sell these currencies in Dubai and bring back equivalent US dollars were unable to generate enough supply of dollars. This happened at a time when, due to the refusal by some big currency speculators to sell dollars at the rates offered by the forex firms, the supply of dollars in the open market was already low.

The question arises that why, in the first place, two particular forex companies, or any other for that matter, were averse to making cash payments against the buying of third currencies?

“The answer is that they were employing piles of rupee cash to buy dollars instead, to smuggle them out of the country for undeclared investment in Dubai’s gold market where some speculators, backed by them, were making speculative buying of gold,” says one senior banker with background knowledge of the open market currency crisis.

In a more audacious move, some currency and gold smugglers were found making an attempt to physically smuggle third currencies and also gold from Pakistan to Dubai, to get their share in gold speculation there. Among them were some ‘unknown people’ as well as regular currency hoarders. But, according to media report, their attempt was foiled by the authorities concerned.

Officials of exchange companies say the gap between interbank and open market is wider than normal because, according to them, the currency crisis originated due to their not getting permission, in recent weeks, to bring back home the dollars they had purchased in Dubai by selling third currencies.

According to them a part of the amount was withheld by the authorities, without any valid reason. But, after the intervention of Finance Minister Ishaq Dar, the situation is now coming back to normal.

They say that once supplies of dollars, through this channel, (and on increased sales within Pakistan by those who had amassed them during the crisis) improve, the rupee will gain further in the open market and the gap between the interbank and open forex market will return to 1pc, the level that has, for so long, been maintained.

Executives of forex companies also lament that, (unlike in the past) during this crisis banks did not come to rescue the open market by selling a sizable amount of dollars to them against the rupee.

The SBP at times intervenes in this way and asks banks to sell dollars to forex companies at the prevailing interbank market rate for a few days.

Published in Dawn, Business & Finance weekly, December 12th, 2016