KARACHI: The rupee has appreciated significantly against the dollar over the past year, marking a rare shift as the US currency typically dominates.

Official data showed that the rupee gained around Rs9 per dollar in the interbank market between August 11 and August 13. The open market saw even greater appreciation, with the rupee strengthening by Rs15 per dollar during the same period.

On August 11 last year, the interbank exchange rate stood at Rs287.60, which fell to around Rs278.60 by Aug 13 this year. In the open market, the exchange rate dropped from Rs295 to Rs280 per dollar, reflecting a gain of Rs15.

The trend defies the usual pattern, as the dollar has consistently appreciated against the local currency. Stability in the exchange rate has been observed over the past four months with only minor fluctuations, even in the open market.

Gains Rs9 to a dollar over last year; experts warn grey market is thriving, with $500m sold monthly

“This stability was achieved through strict administrative measures, including a government crackdown on dollar smuggling to Afghanistan and Iran,” said Atif Ahmed, a currency dealer in the interbank market.

At the beginning of FY24, a sharp devaluation of the rupee prompted the government to intervene. The local currency had reached as high as Rs337 in the open market and Rs307 in the interbank market before the crackdown was launched. The grey market, which attracted dollars for smuggling to neighbouring countries, was a significant factor in the rupee’s decline.

However, concerns have resurfaced. Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan, recently revealed that the grey market has reemerged, with an estimated $500 million being channelled there monthly.

This claim has not been officially denied, and financial experts worry that the outflow of dollars to the grey market has resumed, primarily driven by the smuggling of goods that require dollar payments. Afghanistan uses dollars to import goods from Pakistan, while Iran relies on them for smuggling petroleum products into Pakistan.

Local media reports suggest a surge in the smuggling of oil products from Iran, with smuggled oil easily available in parts of Karachi. Meanwhile, smuggling to Afghanistan has also increased, fuelling demand for dollars among Afghans.

“If the grey market is not controlled, the outflow of $500m per month could see a jump and once again a crisis could devalue the local currency,” said S.S. Iqbal, a currency movement expert.

However, financial authorities remain optimistic, citing a stable position regarding foreign exchange reserves held by the State Bank, expected loan rollovers from China, the United Arab Emirates and Saudi Arabia, and hopes for a $7 billion loan from the IMF under a new bailout package.

Published in Dawn, August 15th, 2024