$5m being smuggled from Pakistan to Afghanistan per day: report
As Pakistan struggles to arrange US dollars to pay for essentials such as imported fuel, cooking oil and even pulses, everyday millions of US dollars are smuggled out of the country to neighboring Afghanistan in bags full of cash in a currency drain that is leeching one country to destruction to sustain a neighbor.
This has been claimed in a report by global business news website Bloomberg on Tuesday.
In the report, titled Dollars smuggled from Pakistan provide lifeline for the Taliban, it quoted money trader Muhammad Zafar Paracha as saying that as much as $5 million was crossing the border daily as the war torn country circumvents sanctions.
Paracha, who runs a money exchange company by the same name across the country and is the general secretary of the Exchange Companies Association of Pakistan, said that Afghanistan’s survival is coming at the cost of Pakstan which has seen billions wiped out from its coffers within months, falling from some $16 billion from a year ago to just $3 billion.
As a result, the rupee has come under severe pressure, resulting in the rupee losing around Rs100 in the inter-bank market.
The depreciation has seen Pakistan’s debt in rupee terms shoot up astronomically, leaving the economy scrambling for resumption of a critical loan from the International Monetary Fund (IMF).
Despite sanctions, Afghanistan still gets around $40 million a week from the United Nations in humanitarian support and its central bank says it has sufficient reserves to meet its $10-$15 million per day needs.
It also earns some dollars from customs duties it charges on the borders.
Since Afghanistan lacks a formal bankking network currenctly, US dollars have to be taken into Afghanistan as cash which is then converted into the local currency, the Afghani.
It is the only reason that the Afghani, which was expected to sink to depths equivalent to something like the Zimbabwe dollar, has in fact appreciated by 5.6% over the past year.
Bloomberg said this was “one of the strongest performances of any currency in the world”.
By comparison, the rupee has lost about 37% against the US currency over the period, one of the largest declines.
In January, the worst of the shocks came as it fell about 10% in a single day in January after the government gave into a major IMF demand to let the rupee float free.
Its foreign exchange reserves are currently down to $3.09 billion.
Some say the “smuggling” of dollars to Afghanistan is not malicious. Rather, it is payment for purchase of coal, something that both countries had publicly announced to do.
Where it started to hurt Pakistan was when the Taliban insisted on trading in the US dollar rather than on currency swap basis.
State Bank Governor told Bloomberg that the Pakistan stands to suffer the direct impact of Afghans purchasing dollars from the local market.
One coal dealer told Bloomberg that after purchasing coal in the local Afghani, he takes it across the border where it is sold in rupees with a mark up and then converted back into US dollars and sent back across the border through a traditional but banned currency transfer mechanism called ‘Hawala’.
But with the currency harder to find in formal markets, the coal trader says he now relies more on the black and grey market in the border areas to secure dollars.
To counter this dollar flight, Pakistan has imposed strict restrictions on volumes of dollars people are allowed to carry out through the formal system. For those leaving for other countries, they are limited to carry $5,000 per trip and $30,000 overall anually. The same applies for bank-to-bank transactions.
But for Afghanistan, the per trip limit is currently $1,000 and $6,000 per year.
What is a currency swap?
A currency swap is a type of financial agreement in which two parties exchange currencies and agree to reverse the transaction at a later date. This type of agreement is typically used to hedge against foreign exchange risk, as it allows the parties to obtain the desired currency without having to purchase it in the open market.
In a currency swap, one party will agree to pay a fixed or floating rate of interest in one currency, while receiving a different rate of interest in another currency. The two parties may also agree to exchange a set amount of principal in the two currencies at the beginning and end of the swap. The two parties may also agree to exchange any principal payments at the end of the swap.
Currency swaps are typically entered into for speculative or hedging purposes, and can be used to reduce exposure to foreign exchange risk. They are also used to obtain financing in a different currency, or to access foreign markets. Currency swaps can also be used to transfer risk from one party to another.
Overall, currency swaps are used to hedge against foreign exchange risk, obtain financing in a different currency, or to access foreign markets. They can also be used to transfer risk from one party to another.