Narrowing the gap

Published June 2, 2023

THE rupee made a substantial recovery of 11.5 against the dollar in the open market a day after the State Bank allowed commercial banks to purchase the US currency from the interbank market for settling the credit/debit card-based international payments of their customers. The short-term move, which will expire on July 31 unless extended, has helped narrow the huge gap in exchange rates in the interbank and open market to about Rs15 from Rs27 a day before. The increasing premium on dollar purchases from the open market had recently led the IMF to advise the government to “focus on restoration of proper foreign exchange market functioning”. Thus it can be assumed that the move served its purpose, and the exchange rate gap may narrow further in the next few days with the appreciation of the home currency in the open market. How will the dollar-starved interbank market provide an estimated $30m to $40m a week for the settlement of international card payments? That is the question.

Many market players argue that the move will put more pressure on the interbank exchange rate as dollar outflows would escalate on the back of higher demand for foreign exchange for the settlement of card-based foreign transactions. Others insist that the reduction in the gap between the interbank and open market rates will prove to be an incentive for overseas Pakistani workers to send their money through banking channels and boost dollar liquidity in the system. Apparently, the State Bank is also not certain about the potential implications of the decision and, hence, has initially permitted the settlement of these transactions through the interbank market only for two months. The success of the move will largely depend on how vigilant the SBP and commercial banks are in detecting and stopping the use of card payments to circumvent restrictions on imports imposed over a year ago to slow down dollar outflows.

Published in Dawn, June 2nd, 2023

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