Exchange companies remove cap on dollar to fight black market

The rupee depreciated against the US dollar on Wednesday after the exchange companies removed an unofficial cap on trading, with the local currency down 0.93 percent against greenback in open market.

However, the local currency had seemingly crashed during early trading after the US dollar was available for Rs252. But the rupee regained a huge chunk of these losses and was traded for Rs243 by 11am in the open market against yesterday’s value of 240.75.

A similar trend was witnessed in the interbank trading where the exchange rate closed at Rs230.89 when compared with the previous level of Rs230.40, representing a loss of 49 paisa, or 0.21 percent.

In interbank too, the dollar during early hours had gained Rs1.10 and was available for Rs231.50 followed by a recovery later in the day.

In this connection, ECAP General Secretary Zafar Paracha said a committee of exchange companies would decide the dollar exchange rate in the open market at a meeting later in the day.

He said talks between State Bank of Pakistan (SBP) Deputy Governor Inayat Hussain and ECAP representatives were successful. “The State Bank accepted all our demands including removing the cap.”

Paracha said the SBP further directed commercial banks to supply dollars to exchange companies. He vowed to bring the exchange rate in the open market to the ‘actual’ rate so the black market could be abolished.

Earlier on Tuesday, the currency dealers decided to remove the cap on the US dollar, hoping to end the surging “artificial” demand for the greenback to counter the boom witnessed by the black market.

The move comes as the country is witnessing a dollar shortage resulting in a depreciating rupee as the greenback is currently being traded at three different rates — the official determined by the State Bank of Pakistan, of the exchange companies, and the one in the black market.

In this connection, the ECAP issued a statement after a meeting in which it was stated that they were withdrawing the cap on the US dollar as the limit was causing adverse effects.

There is artificial demand in the market as people would buy the dollar and sell the same in the black market, the statement mentioned, highlighting the impact of different rates.

As a result of the people opting for this, the business was shifting from official channels to the grey ones, hurting not only the reserves but also dealing losses to the exchange companies.

Explaining the reason behind the removal of the cap, the association said once the dollar was allowed to trade at the market value, the customers would automatically shift from the grey market to the legitimate channels.

Paracha told a private TV channel that as much as 90 percent of the demand was fictitious. “Through this step, we aim to provide people with the actual value of their money. Supply of the dollar will increase and demand will come down; it will have a positive impact on the market.”

Paracha added that although the rates would be determined by market forces, he foresaw the dollar being traded at Rs254-257 — close to the price in the black market.

In response to a question whether he believes Finance Minister Ishaq Dar would remove the cap placed on the dollar, Paracha said: “I am hopeful that things will move in a better direction.”

The ECAP general secretary said the dollar’s value had increased against the rupee — which closed at 230.40 in the interbank market on Tuesday – in the last 10 days.

Paracha said, “Things will become better as all the forums, including the International Monetary Fund (IMF), are demanding the removal of the artificial cap.”

He added that if this intervention did not work, the association would meet again later in the week to discuss the future line of action.

The ECAP secretary general noted that the remittances — which dropped 19 percent in December to $2 billion from $2.52 billion in the same month of 2021 — would also witness an increase after the cap’s removal.

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