Taking cues from regional countries, the open market’s currency dealers have proposed offering a better rupee-dollar exchange rate of Rs240/$ to overseas Pakistanis. The aim is to boost the inflow of workers’ remittances and stabilise the country’s dwindling foreign exchange reserves.
To recall, a section of non-resident Pakistanis apparently switched to informal banking channels, like illegal hawala-hundi operators, in order to dispatch funds to their relatives at better exchange rates. Currently, the black-market is offering Rs265/$ while the controlled rate in the interbank market stands at Rs228/$.
Accordingly, workers’ remittances have continued to drop for the fourth consecutive month, hitting a 31-month low at $2 billion in December 2022, and little has been done to mitigate the impact of the black-market exchange rate.
Remittances have dropped cumulatively by 16% since Ishaq Dar returned to the country as finance minister in late September 2022 and immediately started controlling the rupee-dollar exchange rate instead of letting the market forces (mostly the commercial banks) determine the currency parity in interbank market. His measures, however, breathed new life into the black currency market that had collapsed during the Covid-19 pandemic.
Speaking to the Express Tribune, Exchange Companies Association of Pakistan (ECAP) General Secretary Zafar Paracha said, “The offer of a better price (exchange rate) to overseas Pakistanis will not only bring lost inflows back into the system, it will boost the workers’ remittance inflow by 15% within six months (January-June 2023).”
The association has sent a proposal to the government, including the ministry of finance, suggesting a fixed exchange rate of Rs240/$ for overseas Pakistanis.
“Regional countries, including Sri Lanka and Bangladesh, have started offering a better price to their overseas residents to bring the lost workers’ remittances back into the system,” said Paracha.
Since the appointment of Finance Minister Ishaq Dar on September 28, 2022, not only has the gap between the interbank and open market rate increased, it has also given birth to a new rate in the black-market due to a short supply of dollars.
According to a research report released by Topline Securities, “Post Dar’s appointment, remittances have come down 16% year-on-year in Oct-Dec 2022 to $6.4 billion.”
As per the latest regulation issued by the State Bank of Pakistan (SBP), one of the main reasons behind the dollar shortage is that now exchange companies are required to surrender 100% of the inward remittances to the interbank.
Banks then use the interbank rate as the official rate for trading with other banks and for imports and exports. This is currently hovering around Rs228 against a dollar and went as low as Rs240 before Dar announced an inquiry against banks on currency speculation and initiated administrative measures to control the official currency rate.
Pakistan’s export earnings have also dropped significantly over the rebirth of the black currency market, however, “Exporters should be offered the rate hovering in the interbank market (Rs228/dollar), whether it remains stagnant or depreciates to Rs240,” advised Paracha.
“Exporters (mostly) bring proceeds through banking channels instead of using hawala-hundi operators. Workings suggest that importers be offered dollars at Rs234 – the proposal will encourage inflows and discourage outflows,” he said.
The Sri Lanka, Bangladesh case
Topline Securities said in a research report that recently Sri-Lanka also witnessed a sharp fall in workers’ remittances amid a rise in the spread between the interbank and the open market/black market rates. Its remittances fell by 23% to $5.4 billion in 2021 while monthly remittances fell to $325 million in December 2021 versus a peak of $813 million in December 2020.
This started devaluing their currency, which led to gradual reduction in open market currency premium. The Sri Lankan currency devalued by 50% against the dollar in 2022 in the interbank market.
After making a two-year monthly low of $205 million in February 2022, remittances started improving – with the latest November 2022 remittance number at $384 million – up 42% year-on-year and up 87% from a low of $205 million in Feb 2022.
The country, however, defaulted on foreign payments in May 2022. Bangladesh presented a similar trend with remittances declining from $2.2 billion in May 2021 to a low of $1.49 billion in February 2022.
Bangladesh did not devalue its currency during this period and the difference between the interbank and open/black market rate started to widen. Since August 2022, the BDT devalued by 10% against the dollar and by 17% in 2022. “This has led to a reduction in premium in the open market currency rates and improvement in some remittances are also visible,” said the report. Remittances in December 2022 for Bangladesh are up 13% to $1.7 billion from a 2022 low of $1.49 billion in February 2022, said the Topline Securities report.
Published in The Express Tribune, January 17th, 2023.