Interbank vs Open Market: Why Pakistan Has Two Dollar Rates

Pakistan quotes two prices for the same dollar, and the distance between them has done more damage to the country’s external position over the past four years than almost any other single number.

Right now that distance is small, and the results show it. Overseas Pakistanis sent a record $41.6 billion in FY26, up 8.6 per cent from $38.3 billion the year before. July, the first month of FY27, brought in $3.631 billion. State Bank reserves climbed to $18.4 billion from $13 billion a year earlier. The rupee has held near Rs278–279 to the dollar.

None of that is coincidence, and understanding why requires understanding what the two rates actually are.

The two markets

The interbank market is where commercial banks trade dollars with each other. It settles trade payments, oil import letters of credit and sovereign obligations. It is the rate the State Bank monitors and the one quoted in economic coverage.

The open market — the kerb market — is where licensed exchange companies sell physical cash to individuals: travel allowances, overseas student fees, small business needs. It carries a natural premium of roughly half a per cent to one and a half per cent over interbank, covering logistics, vault insurance and dealer margin. Both are legal and regulated.

Then there is a third rate nobody publishes: the hundi and hawala rate. It is illegal, it is priced off the kerb market rather than interbank, and it is the reason the gap between the first two matters at all.

How the gap actually moves money

Take a construction worker in Sharjah sending money to Gujranwala. Through a bank or a licensed remittance company, his dirhams convert at a rate anchored to interbank. Through a hawala operator, they convert at something closer to the kerb or black rate, and the cash reaches his family the same afternoon without a form.

If the two rates are within a rupee or two, the formal channel wins easily — it is traceable, it is legal, and the difference is not worth the risk. If the gap opens to Rs20 or Rs25, the arithmetic inverts. On a Rs500,000 transfer, a Rs25 gap is roughly Rs45,000 in the family’s hand. No amount of public messaging competes with that.

This is not theory. In FY23, with the gap wide and the unofficial rate quoted above Rs300 while the open market sat near Rs295, remittance inflows fell 12.8 per cent — a drop of $3.68 billion against the previous year. The money did not stop coming. It stopped being counted, which meant it stopped reaching the State Bank’s reserves and stopped supporting the rupee, which widened the gap further. That loop is the mechanism by which an exchange-rate spread becomes a balance-of-payments problem.

Why the gap closed

Several things moved at once. The State Bank tightened regulation of exchange companies and pushed the sector to consolidate. Enforcement against informal networks increased. The rupee steadied, which removed the incentive to hold dollars back and wait for a better rate. And the remitter base grew sharply, with large-scale migration to Gulf Cooperation Council states expanding the number of people sending money at all.

The corridor data for FY26 shows the scale. Saudi Arabia sent $9.783 billion, the United Arab Emirates $8.807 billion, the United Kingdom $6.326 billion and European Union countries $5.227 billion. May 2026 produced $4.25 billion, the highest single month in Pakistan’s history.

The exporters’ complaint

Exporters read the same stability differently, and their objection deserves a fair hearing. When the rate is held steady while domestic costs rise, an exporter earning dollars converts them into fewer real rupees each year. Textile and surgical-goods manufacturers argue that a managed rate quietly transfers margin away from the only sector bringing foreign currency in, and makes Pakistani goods more expensive against Bangladeshi or Vietnamese competitors whose currencies have moved.

The counter-argument is equally concrete: Pakistan imports its fuel, and a weaker rupee raises the cost of every litre of diesel, every LNG cargo and every dollar of external debt service. Stability is what pulled remittances back into the formal system. There is no setting of the exchange rate that satisfies both sides, which is why the argument recurs every year rather than being resolved.

What could reopen the gap

Three risks are worth watching. The State Bank has wound up the remittance incentive schemes that supported inflows through most of FY26, removing a subsidy that was doing real work. Central bank projections put FY27 remittances at $44 billion, which assumes the current pattern holds. And Gulf labour markets are exposed to regional instability — a slowdown in GCC hiring reaches Pakistani household incomes within months.

If any of those bite while the gap widens, the FY23 loop can restart. It has restarted before.

How to read it yourself

The State Bank publishes the daily interbank rate; the Exchange Companies Association of Pakistan publishes open-market quotes.

A spread inside about one and a half per cent is normal market friction.

A spread past three per cent, sustained for several weeks, is an early warning — informal channels are becoming attractive again.

Watch it alongside the monthly remittance release, not on its own. The gap is the cause; the remittance number is the effect, and it arrives with a lag.

For anyone actually sending money home, the practical point is simpler. Formal channels are traceable, protected and can be reversed if something goes wrong. Hawala transfers are illegal for both sender and recipient and carry penalties under anti-money-laundering law, and no exchange-rate advantage survives a confiscation.