KARACHI: The State Bank of Pakistan’s (SBP) decision to permit banks to buy dollars from the interbank market for the settlement of card-based cross-border transactions caused the US dollar to drop as much as Rs15 on the open market on Thursday.
When compared to the Rs311-318 traded a day earlier, the open market started with low dollar pricing and traded as low as Rs298. Beginning in May 2006, card-based transactions using the International Payment System (IPS) were settled by purchasing dollars from exchange businesses.
The SBP made this crucial choice to meet one of the requirements outlined by the IMF for coming to a staff-level agreement for unlocking the stuck-up tranche: to minimise the increasing disparity in dollar rates between open and interbank markets. The dollar’s open market closing price was quoted by the Exchange Companies Association of Pakistan (ECAP) at Rs299 and by the Forex Association at Rs298.
The dollar dropped Rs12 or Rs13 at the reported closing rate on Wednesday of Rs311.
$102 million less in central bank reserves
However, according to currency specialists, dollar exchange rates were significantly higher than those stated by the exchange providers. Before the SBP decision, the dollar was traded on Wednesday between Rs318 and Rs320.
Although the State Bank’s action was successful in lowering open market dollar rates, there is still a differential of up to Rs13 per dollar. Currency specialists predicted that this discrepancy would benefit bank clients, who may now purchase dollars at lower prices.
This might make it possible for credit card owners to send money abroad. But it would cause further harm to a nation already struggling with a dollar shortage and mounting debt service costs.
“Illegal currency operators might use a cheaper dollar for their payments. They can purchase dollars on the interbank market for Rs285, which is six to nine percent less expensive than the going rates on the open market. Money will leave the country as a result, according to Malik Bostan, chairman of the ECAP.
He proposed levying a 10% tax on luxury goods purchased with credit cards outside of the country. He claimed that the State Bank’s and the government’s efforts to conserve money would be completely destroyed by the settlement of payments by unlawful operators through credit cards and shopping for opulent goods.
A reward for the wealthy
However, some prominent bankers and currency merchants opposed the central bank’s choice.
A senior banker declared, “The choice has been made for the rich who will now enjoy summer vacations in Europe and the United States with cheaper dollars.
According to a Wednesday circular from the State Bank, these directives are effective immediately and last through July 31.
Although there is no official information available regarding the number of travellers, he said that hundreds of thousands of Pakistanis travel during the summer holidays with their families. Concerning the timing of the State Bank’s decision, the banker voiced his reservations.
“There is no doubt that this move will result in larger dollar outflows. The banker predicted that this would only make things worse for the nation’s impoverished.
Every week, banks spend $30–$40 million on credit cards. Maintaining a minimum of $30 million every week entails spending $120 million per month and $240 million over the next two months.
The State Bank announced on Thursday that during the week ending May 26, its foreign exchange reserves had further decreased by $102 million. With only $4 billion in reserves, the central bank is barely able to cover its debt payments through June 30.
According to the State Bank, $102 million is being utilised to pay for the servicing of external debt. Total reserves decreased to $9.513 billion, of which $5.422 billion was held by commercial banks.
During the same week, commercial banks’ reserves fell by $116 million.