In early trading on Wednesday, the Pakistani currency tested a new all-time low of Rs240 against the dollar. The country’s top policymakers described the current economic situation as “worrisome” and “stressful.” A parliamentary hearing confirmed reports that commercial banks quoted high dollar rates, causing exchange market volatility.
Eight commercial banks that have been served with show-cause notices did not deny quoting higher dollar rates against the rupee at a Senate session. Each one blamed the market’s dollar shortage.
Dr. Aisha Pasha, minister of state for finance, called the current scenario “worrisome”
Dr. Inayat Hussain, vice governor of the SBP, called the situation “stressful.”
The committee, led by Senator Saleem Mandviwalla, summoned eight commercial institutions suspected of currency manipulation.
National Bank of Pakistan, Allied Bank Limited, Bank Al Habib, Standard Chartered Bank, Meezan Bank, Habib Bank Limited, HabibMetro Bank, and United Bank Limited were represented.
The central bank deputy governor said these banks were handed show-cause warnings because they quoted importers higher dollar rates and reaped large profits.
The deputy governor said the eight banks were chosen based on their trade volumes and “significant profits” through June.
Dr. Hussain said banks’ high rates on some transactions caused instability and confusion.
The hearing took place the day Pakistan’s rupee hit Rs240 per dollar, mainly due to these institutions’ activities, an analyst said.
The rupee recovered and closed at Rs239.65.
The deputy governor said both the central bank and commercial banks were stressed. Due to the imbalance between foreign inflows and outflows, we must restrict 15-20% of imports, he added.
“Until the outflows balance with the inflows, these restrictions will stay in place,” he said.
Senators questioned the delay in opening letter of credits (LCs), an international trade instrument, and prompt import payments.
“We’ve received requests to open LCs, but we’re discouraging those with advance payments or non-essential imports,” the deputy governor stated.
Since the limits were imposed, 8,000 LCs have been approved.
“LCs are cleared on schedule, and when possible, banks offer a grace period of three to five days from the LC’s maturity date,” Dr. Hussain stated.
The deputy governor said banks had negative open positions and sold more dollars than they had. Due to extreme volatility, banks have raised spreads to offset losses.
The dollar is out of control, claimed PTI senator Mohsin Aziz.
Former finance minister Shaukat Tarin called buying from exporters a hazardous slope.
“The rupee didn’t strengthen dramatically after the IMF programme was revived because the markets had already adjusted the value,” Dr. Aisha added. “Pakistan is going through a tough time; now is not the time to handle the economy.”
Commercial bank representatives gave their own justifications, but none could deny that they quoted importers higher dollar rates on some transactions.
Senator Aziz believes banks are exploiting the situation. Due to a wide discrepancy between interbank and open market rates, exports and remittances may collapse, pushing the government towards default, he noted.
UBL’s Shahzad Dada said the concern is the rising current account deficit. “It’s unclear if the current account deficit will fall.”
He sought to rationalise the larger profits by arguing the banks’ margins were the same but the volume of deals rose.
The UBL president added, “We’ve had good and poor months.” High volatility has banks repositioning.
He said the UBL lost $7-$8 million in September alone. “High current account deficit will strengthen the dollar.”
The HBL spokesperson claimed banks couldn’t acquire dollars from the market owing to a scarcity and that imports needed to be restricted to restore confidence.
ABL said banks built sufficient profits to cushion high-volatility losses. The ABL lost Rs700 million in September, he claimed.
The ABL spokesman remarked, “Reading the market is difficult, and we make and lose money.”
The Bank Al Habib spokesman said excessive volatility caused currency rate losses since June.
The Standard Chartered Bank official stated overcharging was a judgement error.
Meezan Bank stated it may have overpriced to protect itself.
HabibMetro Bank also imposed a risk premium due to extreme volatility.
“Pakistan is in a perfect storm, but the situation may improve once $2.7 billion inflows from foreign creditors materialise,” Dr. Aisha remarked.
Former information minister Shibli Faraz said banks were withholding $1 billion in unpaid LCs.
Central bank and commercial bank representatives denied it.