Pakistani rupee falls after market maker group removes currency cap
The Pakistani rupee weakened by 1.2 per cent in the open market on Wednesday after foreign exchange companies removed a cap on the exchange rate, saying it caused "artificial" distortions for an economy in desperate need of International Monetary Fund help.
The move towards a market based exchange rate should please the IMF, as that is one of the conditions that the multilateral lender has set before it agrees to unlock a stalled bail-out programme for Pakistan.
Battling the highest inflation in decades, the central bank has raised interest rates sharply, but the country has barely enough foreign exchange reserves to cover three weeks of imports and is struggling to meet its external financing obligations.
The Exchange Companies Association of Pakistan (ECAP) said late on Tuesday it was lifting the cap on the currency in the interest of the country.
"We have decided that we bring the exchange rate at par (with) what we are supplying to the banks against credit cards," ECAP Secretary General Zafar Paracha said in a statement, adding that level is 255/256 rupees to the dollar.
The rupee was bid at 240.60 to the U.S. dollar and offered at 243 in early open market trade, ECAP said in a statement, compared with a range of 237.75/240 at the close on Tuesday.
So far, the rupee has depreciated 11.23 per cent against the dollar during the 2022-23 fiscal year, which ends on June 30.
Before the cap on the rupee was removed, markets eyed three different rates to assess its value - the state bank's official rate, the one assessed by the foreign exchange companies and the black market rate.
"Though the bank rate for today is not been disclosed yet, we think the dollar rate in banks may fall by up to 5 per cent in few days," said Mohammed Sohail, chief executive officer at brokerage Topline Securities.
ECAP's president Malik Bostan told Reuters that the central bank had given an assurance at a meeting that commercial banks would be instructed to supply exchange companies with dollars.
"We're facing a shortage. We do not have physical dollars," Bostan said. "People aren't selling dollars. They're only buying."
He said the removal of the cap would curb the black market.
"The black market rate is still sticky in the range of 260-270. The decision of exchange companies has not had any impact as such," said Fahad Rauf, Head of Research at Ismail Iqbal Securities.
Pakistan Stock Exchange (PSX) responded positively to the decision to remove the currency cap, with its benchmark index standing 1.77 per cent higher by shortly after noon. Topline's Sohail said investors hoped the removal of the cap would help to persuade the IMF to resume disbursements.
The IMF is yet to approve its ninth review to release $1.1 billion, which was originally due to be disbursed in November last year. The Fund wants Pakistan to cut subsidies, slash energy sector debt and levy more taxes to reduce the budget deficit, and make the transition to a market-based exchange rate.
Pakistan's Prime Minister Shehbaz Sharif said on Tuesday that his country was willing to discuss all of the IMF's demands.