Dollar shackles break as exchange companies decide to remove “dollar cap” 

Dollar will trade upwards of 254, from Wednesday: secretary of the Exchange Companies Association of Pakistan. 

The Exchange Companies Association of Pakistan on Tuesday announced that they would no longer be going forward with the “dollar cap”. In a statement, the secretary ECAP Zafar Paracha said that, “ the association was withdrawing the cap on the US dollar in the “nation’s interest” as the limit was causing adverse effects.”

What did the ECAP say?

“As a result (of the cap), the business was shifting from official channels to the grey ones, hurting not only the reserves but also dealing losses to the exchange companies,” Zafar Paracha added. He further said that once the dollar was allowed to trade at the market value, the customers would automatically shift from the grey market to the legitimate channels.

Talking to Profit, the Chairman ECAP Malik Bostan said that,  “Neither was the dollar cap yielding positive results for the exchange business nor was it proving to be beneficial for the country.” He informed that the companies had to dump a majority of their remittance earnings in the interbank market due to high interbank demand for imports, and the open market was more keen on buying, than it was on selling. 

The Regulator vs The Regulated?

In an attempt to regulate the forex reserves, the State Bank of Pakistan suspended 11 outlets of 8 exchange companies on Monday. The outlets were found guilty of hoarding dollars and violating the regulatory restrictions. However, Malik Bostan, Chairman ECAP told Profit, that it was a mere coincidence for these two events to occur one after the other.

“The State Bank had been informed of the decision, prior to the announcement.” Malik Bostan, Chairman ECAP told Profit. Talking to Profit, he said that, “The regulator does not meddle in the open market rates, its only concern is to regulate the fee etc.”. He further added that the Deputy governor of the State Bank will be intimated with the details of this decision in a meeting that is to occur on the 25th of January. The office of the SBP’s spokesperson, however, failed to confirm the information of any such intimation. 

What is Happening with the dollar rate?

The fact that there was an arbitrage left in the dollar exchange market, begs the question how that gap was created? To understand that we need to understand the exchange rate. It is now an open secret that the state bank exchange rate is understated as compared to the market value. As a result, as of right now, there are three prices for the dollar. The State Bank of Pakistan’s exchange rate, the exchange companies’ rate and the actual market rate, which in these particular circumstances is also called the “black market rate”. Because the actual market rate is anybody’s guess.

The SBP rate hovers around 230 Rupees/USD. The recognised exchange companies in a response to that, placed a dollar cap, whereby their prices were supposed to be in a prescribed range of the state bank’s rate. And the market, as it mostly is, would be determined by the market forces. With a pegged official rate, the open market rate has been considerably higher, and on the rise in the last few months.

What does this mean for the exchange rate market? This means that the demand for dollars, not just as a currency but as a store of value also increases making it, as Miftah Ismail calls it, “a one way bet”. People start to buy dollars as if they are a housing society’s files, and much like the former example, “dealers” erupt in every nook and cranny, looking to make pennies on the dollar (literally).This creates an even higher open market rate, creating ample room for the practice of Hawala and Hundi that keeps on increasing. In such a circumstance, for the open market players to have a cap on the dollar’s price would not only be detrimental, but more importantly it will increase the dollar’s rate even further.

The decision of the open market players to hence remove the cap is in response to this, not-so-sudden, realisation. What prompted this decision? A crackdown? a gap in the market? Exchange companies’ business interests? The bottom line is; “their bottom-line”, if nothing else.

 

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Shahnawaz Ali
Shahnawaz Ali
The author is a Finance journalist at Profit and can be reached via email at [email protected] and via twitter @shahnawaz_ali1

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