‘Official’ and ‘actual’ rates emerge within open market rate of the dollar

KARACHI: Amid the rupee’s spiraling descent, multiple rates for the US dollar are emerging within the open market as well. While the gap between the interbank rate and the open market is continuing to grow despite IMF requirements, exchange companies are also selling dollars on the open market at a much higher rate than quoted by the Exchange Companies Association of Pakistan (ECAP).

According to ECAP’s latest rates on Wednesday, the US dollar is being sold at Rs 312 and bought at Rs 309 in the open market, respectively. With the interbank rate of the dollar being reported at just under Rs 300, this would indicate a gap between the interbank and open-market rate of around 12. However, the reality is much different. Profit reached out to two exchange companies to find out the actual rates and availability. 

AA Exchange quoted a sell rate of Rs 313 and a buy rate of Rs 310. The company also pointed out that dollars were not available for sale. 

Separately, Habib Qatar International Exchange said dollars were available for sale at the rate of Rs 315 per dollar while the company would buy them for Rs 313 a dollar. It also asked for the reason for buying dollars before confirming their availability. 

Largely it seems that the on-ground situation is that the dollar is selling at around Rs 315 in exchanges. Meanwhile, the rupee closed at an all-time low of Rs 299.64 against the US dollar in the interbank market, according to the State Bank of Pakistan (SBP). It is worth pointing out that the International Monetary Fund (IMF) has stipulated that the gap between the interbank and open market rates cannot be higher than a set percentage of 1.25% for more than five business days. 

At the current actual gap of around Rs 15.36 (with the interbank at Rs 299.64 and the open market rate at around Rs 315) the percentage difference stands at just over 5.13%. At the rate quoted by ECAP (Rs 312) the difference is Rs 12.36. This means at this “official” gap rate the percentage difference is just over 4.12% which is still higher than the stipulated percentage. This means that if the rate of the dollar does not fall on the open market the interbank rate will have to catch up no matter what. 

It is important to note here that the difference in rates in the open market was more pronounced in the afternoon. According to the ECAP’s afternoon update – the association shares rates twice a day – the sell rate of the dollar was Rs 306.5 while the buy rate was Rs 303.5

To put these different rates into context and understand why they matter, it is important to understand the different currency markets. 

Explaining the gap 

The interbank market, as the name suggests, is a market for banks. It is used by financial institutions to trade currency and currency derivatives with each other. These transactions can be on behalf of third parties done through banks; however, they are primarily done for the banks themselves.

Since May 1999, Pakistan has been following a market-based flexible exchange rate system. As a result, the interbank rate is applicable to all foreign exchange receipts and payments. This is for the private and public sectors. The exchange rate depends on the demands and supply conditions in the domestic interbank.

The interbank is fed by inflows such as imports, remittances, grants, aid, donations, foreign direct investment, and repatriation of profits. Any money that comes into the country through these official channels comes in through commercial banks for their clients. This feeds the interbank.

At first glance, you’re probably thinking that these two markets are vastly independent and do not rely on each other. That is not entirely true. Foreign exchange companies deposit or surrender their net inflows to the interbank at the end of trading days. That makes them a part of the system.

There is usually a differential or spread between the two rates. This is primarily because the exchange companies, while not always charging a commission, charge a margin so that they make money.

As a result, the interbank and open market are two different rates. In normal circumstances, the difference between the two rates is small, however, in times of volatility, the spread may grow. Sometimes, however, the interbank rate is higher than the open market rate. This is very rare but has happened. 

As a retail buyer, you do not have access to the interbank rates. Instead, you go to the open market for all your foreign currency needs. The open market in Pakistan, or kerb market, primarily consists of foreign currency exchanges where individuals can go buy and sell currency.

The open market, however, gets its inflows through remittances, travelers exchanging notes, and sometimes savers exchanging the currency they have held on to. You may be confused about remittances being an inflow in both the interbank and open market. This is because customers have the option to decide which channel to send their remittance from.

The disparity in rates

It is clear that exchange companies are reluctant to sell dollars and if they do, the rate is much higher than the “official” one released by ECAP. There is, however, a caveat: even if an exchange company has dollars available, it will ask you the reason for buying them and will decide accordingly whether they can be sold to you. So, what if exchange companies don’t sell you dollars or if they are not enough?

You would then go to the grey market, where you could purchase the dollars without any questions asked, albeit at much higher rates than even the open market. 

This effectively means that the open market is not a free market at the moment. If it was, dollars would be available and money-changers would not ask for reasons before selling them. This also refutes the impression that the rupee is falling in the interbank so the rate aligns closely with the open market as has been suggested by analysts. 

In the standby agreement signed in June, the International Monetary Fund (IMF) had asked the government to ensure that the percentage difference between the interbank and open markets does not exceed 1.25 percent for more than five consecutive business days. Analysts had cited two reasons for the rupee’s decline in the interbank market in recent days — one, the lifting of import restrictions that put pressure on the rupee as demand for dollars increased, and two, an attempt to narrow the gap between the rates in the two official markets. 

However, this does not appear to be the case as the difference still remains wide despite seemingly unofficial restrictions on selling dollars. If these restrictions were lifted, the rupee would fall far lower and the dollar rate would be much higher than the one currently being quoted.