IMPLICATIONS OF MULTIPLE EXCHANGE RATES
Govt, IMF have different views on the issue while money changers favour multiple system
By AMANULLAH BASHAR
Nov 02 - 08, 1998
The International Monetary Fund (IMF) and the Government of Pakistan have different views on the prevailing multiple exchange rates in Pakistan. While the IMF is continued to pressurize the government for a single exchange rate, the government seems determined to keep on the track because it feels comfortable in the existing system of multiple exchange rates in the prevailing financial crisis.
The money changers, who have to operate under the exchange rate system, were in favour of the multiple system.
Malik Muhammad Bostan, President of Forex Association of Pakistan, while commenting on the situation, said that over dollarisation during the recent years is the root cause of the problem. People had gone mad in investing their money in dollars due to rapid devaluation of the rupee. Instead of investing in productive channels, people preferred to keep their money in dollar accounts to make easy money which also proved instrumental in artificially raising the price of dollar against rupee.
Bostan said that the craze of dollar account had made the people to join the race to keep maxim dollars in their accounts. They used to buy dollars from the open market to put them in their dollar accounts. This dollar craze artificially raise the volume of trade upto $20 million per day in the money market. No charm was left in the Pak rupee for the Pakistani people which was the worst effect of dollarisation on the economy.
The size of the foreign currency deposits have gone up to $11 billion at the time when foreign currency accounts were frozen on May 28.
The excessive dollarisation of the national economy had its overwhelming effects on the banking sector. The artificial demand for dollar had consequently increased the dollar price. Although the trend has been rolled back in the wake of freezing of the foreign currency accounts (FCAs) and the dollar rates are steadily showing the sign of stability in the country. The speculators have fled away and the current market is showing the genuine trade activity, said Anwar Jamal, another prominent money changer.
Consequently, the trade volume of the money market, which once used to be in the region of $15 million to $20 million per day has come down to a level of $2million to $5 million these days.
The drastic cut in the volume of trade in the money transaction is attributed to more than one reasons. The government's intervention with multiple rates has scared away the speculators from the capital market.
Malik Bostan also pointed out that actual demand of the market is around $10 million to $15 million dollar a day. Whenever the supply of dollar from Dubai is delayed, the scarcity pushed the dollar rates in the open market. He felt, it seems that some sort of money mafia is working in the open market. The modus operandi of this group is to buy all available bills of US dollars from the market. They have the holding powers, therefore, they hold the stock till the time when needy people are prepared to buy them at any cost.
Another factor, which is talked about, for narrowing down the money market is stated to be the rumours about sneaking of the fake dollars in the money market. It is said that the fear of fake dollars kept a large number of prudential investors away from the market. The rumour, however, seems to be invalid, especially in view of the unquestionable expertise of the money traders who are more competent than the testing machines.
Anwar Jamal, commenting on the shrinking home remittances through the official banking system, said that there is a difference of six or seven rupee between the official and the kerb rates. It is a big margin which needed some immediate steps to improve the situation. He suggested that in order to attract workers home remittances, a five per cent additional bonus be given exclusively to the workers to beat the 'Hundi' system.
Malik Bostan further suggested that in order to bring stability in dollar-rupee parity, the government should allocate an amount of $20 million which is the maximum requirement of the money market. This fund should be used for intervention into the market whenever a short-supply of dollar is artificially created by the manipulators.
The government has allowed students, patients and some other travellers to buy dollars from the open market at the rate of Rs56 after showing travel documents but not exceeding to the ceiling of $2,000.
Malik Bostan indicated that the government is determined to stick to the official bank rates of Rs46 for the frozen FCAs while forex reserve position does not allow it to unfreeze the foreign currency accounts in near future.