The continuous decline of the Pakistani rupee against the US dollar has led experts and stakeholders to point fingers at the influence of the grey market and the interference of the International Monetary Fund (IMF) in the country’s banking and currency sectors.
There are allegations that the IMF has become deeply involved in Pakistan’s financial system, engaging with local exchange companies and banks at a granular level. This increased interaction is believed to stem from the IMF’s mistrust towards the government, leading them to directly determine dollar rates from the banking and open markets.
Bankers and currency dealers have voiced concerns over the challenging conditions imposed by the IMF as part of a $3 billion arrangement. These conditions include maintaining unrestricted imports and not intervening in the exchange rate. Some argue that these conditions have caused the government and State Bank of Pakistan to lose control over the exchange rate, resulting in negative impacts on the economy.
Interim Finance Minister Shamshad Akhtar has expressed her commitment to follow the IMF framework and is reportedly planning a crackdown on illegal exchange companies.
Currency dealers have identified three types of grey markets: unlicensed individuals or firms trading in currency, exchange firms with selling prices close to the grey market rate, and overseas operators who conduct transactions outside of Pakistan. The overseas operators are deemed the most harmful since they do not bring dollars into Pakistan, leading to a decline in remittances.
Zafar Paracha, General Secretary of the Exchange Companies Association of Pakistan, attributes the weakening rupee to the shortage of dollars and high demand. He also highlights the attractiveness of currency trading, which has lured thousands of people and attracted inflows from remittances and export proceeds.
While the grey market and IMF interference are seen as significant factors, experts also point to political and economic instability as contributors to the vulnerable exchange rate, particularly since the caretaker government assumed power.
“The word ‘interim’ amplifies the existing uncertainties. This government is likely to incur more losses than the previous one,” says Amir Aziz, an exporter of finished textile products.
Faisal Mamsa, CEO of Tresmark, remarks, “The interim government’s attempts to exceed its perceived capacity are sending conflicting messages to the markets.”