Rupee starts "behaving" - PKR 20 gain to 310/$ is welcome but do more!

September 06, 2023 (MLN): It's clear from the current reversal in the open market from PKR 335 to PKR 310/USD that speculator activity was dominant in creating an artificial demand for the greenback. Hoarders, pessimists and "sattay baaz" need to pay the price for toying with exchange rates.

The market is so illiquid that a marginal improvement in sentiment can instil confidence. 

Or is it the fear of action? Extensive interaction between military and business leadership has created panic among speculators. Strangely or not, always felt the stick works in Pakistan - no wonder deployment of security personnel outside exchange companies is perhaps doing the trick.

The spread between interbank (307/USD) & open market (310/USD) has narrowed considerably from 8 to ~1%. Now the job begins. 

The State Bank of Pakistan (SBP) has sprung into action to consolidate the rules of the game of exchange companies. By increasing the minimum capital requirement from PKR 200M to PKR 500 and forcing franchise/category "B" exchange companies to merge/sell businesses, a clear warning is being sent.

Moreover, commercial banks will be setting up new arms of exchange companies to facilitate the public at large. 

These actions may create a short-term hue and cry but seem irreversible and better in the long term to dissuade the culture of the unofficial market (hawala/hundi) and manipulation in the open market.

Dollars, Dirhams, Riyals etc should NOT be sold to anyone without legitimate cause. For now, fear is rightly instilled and a further increase in remittances may actually improve the interbank rate. No point in appreciating the currency - better to top up some USD to mop the floor. 

Do not get carried away. This is a reactive approach to solving the crises. Economic and currency stability are intertwined with export and remittance growth.

Reining in inflation is thus vital (Brent @ USD 90!) to stabilize currency, fiscal, monetary and capital markets.

Speculators are hereby advised to refrain and Rupee-fy themselves. For country's sake. Fire fighting to continue.

The author is an independent economic analyst and writes on Twitter and Linkedin.