Due to the dollar shortage, the central bank has stopped releasing any dollars, and the market is struggling to balance itself. In order to tackle the situation, banks have started settling international transactions through the open market. Independent economic analyst A H H Soomro said; “Banks have no choice now but to settle at an open market rate. There are no dollars being shed by SBP so the open market has to balance itself. It will eventually push the interbank rate somewhere in the middle. There will be another layer of 10 to 15% inflation across the board very soon. We have boxed ourselves in now and only a fresh government can give a roadmap.”
International Transactions Carried out at Open Market Rates
According to SBP, the Pakistani currency is valued at 227-228 against the USD. However, in the open market, the dollar is sitting at 265 and it is being traded at 275. Due to the imbalance between SBP and open market rates, the black market is thriving and has affected state coffers.
Due to the above-mentioned reasons, inflation keeps going higher and it becomes absolutely essential to bring in aggregate currency supply to reduce the inflationary pressures. Soomro said; “Since July 2022, Pakistan has heavily meddled in foreign exchange markets in order to contain volatility and, possibly, to reduce appreciation pressures in major currencies. While it paused once or twice to indicate exchange rate flexibility, there were consequences in terms of real economic drawbacks which have now been realized, such as commodities that moved up a tier into the realm of real value assets.”
Dollar Liquidity Crunch is Engulfing the Economy
Jittery markets are a reflection of a heightened dollar liquidity crunch engulfing the economy. The central bank holds FX reserves to ensure liquidity to meet a country’s international financial obligations and to reassure markets. However; the depletion of reserves has kept the markets on edge. A private equity broker said, “Banks will make the process more difficult this year. They’ll make it a sweet practice to buy dollars on the open market to settle transactions because the rate is higher and SBP doesn’t touch it, nor does it plan on regulating the space any time soon.”
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