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The grey currency market in Pakistan has reemerged, fueled by a surge in the smuggling of US dollars to neighboring countries. This shadowy market operates outside the official remittance channels, offering exchange rates that are significantly higher than those set by the government. According to Zafar Paracha, General Secretary of the Exchange Companies Association of Pakistan, the grey market is currently providing an exchange rate of approximately Rs284 per US dollar, which is Rs4 higher than the official rate of Rs280.
Experts attribute the revival of the grey market to increased smuggling activities, particularly to Afghanistan and Iran. This smuggling has created a heightened demand for dollars within the local market, contributing to the market’s resurgence. The government’s previous crackdown on the grey market in 2023, which had succeeded in bringing some control by curbing the US dollar’s value from Rs340 in the open market to Rs307 in the interbank rate, has now been undone.
The impact of this resurgence has been severe. The grey market boom has led to a substantial loss in remittances, with a reported $4 billion shortfall in FY23. This loss, combined with the effects of cross-border smuggling, pushed Pakistan to the brink of sovereign default by June 2023. A $3 billion bailout from the International Monetary Fund (IMF) narrowly averted a full-blown crisis and provided a temporary lifeline for the struggling economy.
Despite the government’s efforts to stabilize the currency market following the crackdown, the grey market’s influence remains strong. If the current situation persists, experts predict that the monthly outflow of $500 million could result in a $6 billion loss by the end of the fiscal year. This loss is expected to be reflected in a decline in remittances, which had risen to $30.25 billion in FY24 from $27.33 billion in FY23.
The grey market’s effect extends beyond Pakistan’s borders, influencing international dollar rates. For instance, the exchange rate for the dollar in Dubai has reached Rs285 due to the market’s activities. Currency dealers note that the higher rates in the grey market lead to dollars being held abroad while remittances are channeled through informal hawala systems. This trend is already apparent, as evidenced by a decrease in the volume of dollars sold by exchange companies to banks. In July, exchange companies sold $335 million to banks compared to $445 million in June, indicating a shift of dollars towards the grey market.
The persistence of the grey market underscores the need for effective policy measures and enforcement to curb illegal currency trading and stabilize the financial system. The ongoing challenges highlight the critical role of maintaining robust regulatory frameworks to safeguard the economy and ensure the integrity of financial transactions.
