KARACHI: The grey currency market — which functions outside the ambit of regular remittances channels — has reemerged due to an uptick in the smuggling of dollars to neighbouring countries, experts have said.

The market is attracting about $500 million per month by offering an exchange rate of Rs4 per dollar higher than the official rate, according to the Exchange Companies Association of Pakistan General Secretary, Zafar Paracha.

“The grey market is offering about Rs284 per US dollar. The rate is higher by Rs4 per dollar compared to the open market rate of Rs280,” he said.

According to currency dealers, the grey market, which was partially controlled following an extensive government crackdown in 2023, has reemerged due to the smuggling of dollars to Afghanistan and Iran, which created a higher demand for the currency in the local market.

The government had launched the crackdown after the US dollar appreciated to Rs340 in the open market, while the interbank rate — which is controlled by the State Bank of Pakistan — remained at Rs307.

The grey market boom translated into a remittance loss of $4bn in FY23 as cross-border smuggling also contributed to the shortage of dollars.

The situation brought Pakistan close to the brink of sovereign default at the end of June 2023, with a $3bn bailout from the IMF just giving enough injection for the economy to survive.

After the crackdown on smuggling and the grey market, the exchange rate gradually stabilised and remained that way for more than four months.

The changing situation

Mr Paracha told Dawn that if the situation remains the same, the monthly outflow of $500m would result in a loss of $6bn at the end of the current fiscal year.

He added that this loss would be reflected in the decline of remittances, which increased to $30.25bn in FY24 compared to $27.33bn in FY23.

“The reemergence of the grey market has already influenced the dollar rate in Dubai, where it has reached Rs285,” said Mr Paracha.

According to currency dealers, the higher rate in the grey market would mean that dollars are stopped in foreign countries while remittances are sent in rupees through the hawala system.

The trend is already visible as the quantum of dollars sold by the exchange companies to banks declined in July compared to June.

“Exchange companies sold about $335m to banks in July against $445m in June,” said Mr Paracha. It indicated that dollars, which were supposed to come through exchange companies, are being deviated towards the grey market.

Published in Dawn, August 7th, 2024