Anatomy of a Black Market

OPINION

Ammar H. Khan

Anatomy of a Black Market

creating grounds ripe for a shadow of black market. Time and again, institutions have tried to tweak market prices, and everytime they have failed, or have made the situation worse. Markets are humbling, but individuals managing affairs may just have the humility to learn from such humbling experiences. Fast forward, a full one year later, we have a parallel There is a dearth of foreign currency liquidity in the country, as the central bank tries to maintain an official inter-bank rate at artificially suppressed levels. As the PKR started depreciating, and became a politicized tool, the ‘independent’ central bank started managing its price. Earlier exchange rate at play. Currently, there are three exchange rates. An inter-bank rate, which is the official rate at which banks transact with each other, or use for conducting trade, etc. An open-market rate, at which individuals can buy foreign currency from licensed exchange companies. However, the same rate is defunct, as it at least pretended that there was no management, and that there is no supply available at that particular rate. One can have the price of the US$ against PKR was fair, but lately they have enough demand, but it is a market and price failure if there is no stopped pretending as well. However, as the price remains arti- supply in the market at that price. ficially suppressed, the flow of foreign currency into the country Finally, the third price is that of the black market, or shadthrough formal channels has slowed down to a trickle. ow market. This is the price at which transactions are happen-

Households receiving remittances are getting an increasing ing in the ‘real’ open market, where demand and supply sets the number of remittances through the informal channels. Similarly, price. Some people may say that they are illegal – well, yes, they any institutions looking to bring in foreign currency liquidity to are illegal. But the core function of a market is determination invest are also delaying bringing in the same given an expec- of an equilibrium point, which is referred to as the price where tation that PKR is set to depreciate against the US$. Finally, demand and supply interact. If institutions that are responsible export receipts have also slowed down, as exporters try to delay for ensuring orderly conduct of the market prefer to fix a price receipt as much as possible to get a better rate in the near future. irrespective of demand and supply dynamics, then a shadow Due to such dynamics, the spread between the exchange rate market will eventually emerge. managed by the central bank, and the exchange rate at which The same has been observed in economies with a currency transactions are happening in the open market, or on the margin crisis over the years. As the official price fixed by the regulator continues to increase. diverges away from the actual open-market price, the crisis

Only about a year back, the central bank imposed deepens further. Currently, the shadow market price is at a draconian measures to restrict purchase of foreign currencies premium of roughly 10 percent to the inter-bank price, but if through exchange companies. Numerous layers of scrutiny and the institutions continue to keep a fixed price and continue to documentation were added to discourage the same, thereby pretend that there is no currency crisis, then the premium is only going to increase further. As long as institutions and the government continue to try to fix a price without taking into context demand and supply dynamics, there will always be imbalances, and there will always be shadow, or black markets. If we want shadow The writer is an markets to stop existing, then we should also stop interfering with prices, and let the market independent function. We should focus on improving market structure and enabling price discovery macroeconomist and through the market, rather than shutting it down and allowing shadow markets to prosper. energy analyst. We can either focus on fixing structural imbalances, or we can continue to believe that a certain arbitrarily fixed price is better than a market determined price.