KARACHI, Oct 24: The difference between the interbank and open market exchange rates is down to 20-25 paisa per US dollar. This may make it easier for the State Bank to move faster towards the proposed merger of the two markets.

“SBP can now move faster (towards the merger of the inter-bank and open market),” said a currency dealer who has been in touch with the SBP officials working on the plan. Earlier this year the SBP had set up a committee headed by Executive Director Farhat Saeed to frame rules for setting up and running foreign exchange companies.

The purpose was to ultimately get rid of 400 money changers and let a limited number of foreign exchange companies operate more like banks than as mere money changers. Apparently the move was to prepare grounds for capital account convertibility.

Money changers say the committee has almost finalized the set of rules that would govern the setting up and operation of the foreign exchange companies. They say once the rules are approved by Governor Ishrat Husain and notified to the public at least half a dozen leading money changers would immediately convert their outlets into foreign exchange companies.

“Since the gap between the inter-bank and kerb rate is almost gone...I believe that the SBP can expedite its plan to merge the two markets,” said a leading money changer who declined to be named.

There is no official word available from the SBP.

But sources in the central bank say the SBP may not rush for the so-called merger of the two markets. They say before the SBP makes a final move for merger of the inter-bank and kerb markets it will have to put in place a very strong monitoring system.

Let us see why? The SBP has framed such rules for setting up foreign exchange companies that hardly a dozen such companies would come up from amongst 400 plus money changers. Once these companies are set up the money changers would be stopped from dealing in telegraphic transfers (TTs): they will only be allowed to deal in cash.

Refraining money changers from dealing in TTs would minimize the chances of capital flight besides making it difficult for importers and exporters to over-invoice and under-invoice their trade.

“Now in order to see that money changers and foreign exchange companies are not trespassing you need to have a fool proof monitoring system,” said a source close to the SBP.

“Until that monitoring system is put in place the SBP should not rush for merging inter-bank and kerb markets.”

There is another hitch. Opinions are divided on whether the rupee can sustain the dramatic gain it has made against the US dollar since September 11 in both inter-bank as well as kerb market. The rupee has so far appreciated by about 4 per cent in the inter-bank market and by more than 8 per cent in the open market. This dramatic recovery has reduced the spread between the two rates from a traditional Rs 2-3 per dollar to only 20 -25 paisa per dollar.

Sources in SBP say whereas some senior central bankers believe the rupee can sustain this huge recovery, the others do not see eye to eye with them.

“It depends a lot on how much external financing Pakistan can get in coming weeks and how soon the US attacks on Kabul would end,” said one official.