When the military was called on to help defend the ailing rupee, licenced foreign exchange traders cheered while their black market rivals in the bazaars of Peshawar, Karachi and other cities shuttered their shops before they got taken away.

The campaign against the informal market has worked. Tens of millions of dollars have poured back into interbank and open markets, dealers say, since raids on black market operators began on September 6.

The rupee, which plumbed record lows on September 5, recovered to below 300 per US dollar on the open market earlier this week, rallying more than 10% from levels prevailing before the clamp down to stand even stronger than the official rate.

While there have been other attempts to curb the black market when the rupee has been under stress, the latest push came after licenced dealers requested army chief General Asim Munir take action, rather than leave it solely to the civilian caretaker government.

Called to Islamabad to discuss how to fix the dysfunctional state of the currency market, Malik Bostan, chairman of the Exchange Companies Association of Pakistan (ECAP), spelt out the problem — hardly anyone was selling or remitting dollars through regular channels. “We were not getting customers. Ninety per cent were going to black market dealers, cutting our supply of foreign exchange,” Bostan explained.

At a meeting last week with officials, including heads of law enforcement and security agencies, Bostan and colleagues said the matter needed to be urgently escalated to General Munir. “The army chief took notice, and the restoration of supply in the open market is credited to him,” Bostan told Reuters. “A task force was made that is now cracking down on the illegal market.”

Representatives of the Federal Investigation Agency (FIA), which focuses on fighting organised crime, and the Inter-Services Intelligence (ISI) spy agency were present at the meeting in Islamabad, said Bostan, declining to say who else was there or who had called the meeting.

Two currency dealers, one in Karachi, the other in Lahore, also said security officials, including officers who identified themselves as being from the ISI, had summoned them to learn what was needed. Spokesmen for the military and civilian government did not respond to requests for comment.

Read also: Govt initiates ‘large-scale’ crackdown on currency smuggling

But a security official, who requested anonymity, hailed the success of the crackdown. “The reason is the initiation and enforcement of administrative measures against hoarders, black marketeers and smugglers of dollars,” the official said. “The government has issued strict orders against unauthorised money changers and other mafias.”

For the past week, the hundreds of currency shops in the usually bustling lanes of Peshawar’s Chowk Yadgar bazaar have been closed. “A few days ago, some people, believed to be law enforcement officials, came here and arrested senior members of this market and put them in their vehicles with tinted glasses and drove them away to an unknown location,” said Haji Luqman Khan, an aged trader, told Reuters.

Locals referred to the plain clothes officials who carried out the raids as “farishtay”, meaning “angels”, a word used to describe ISI agents, but no-one was flashing badges, so who they actually were remains unconfirmed. The raid was one of many across the country.

A security official, speaking on the condition of anonymity, confirmed the military’s role in the crackdown, but said it was working alongside other bodies.

Giving an indication of the scale of the problem posed by the parallel markets, Sheikh Allauddin, the president ECAP, reckoned annual transactions in the black market were roughly $5 billion, compared to $7 billion in the regulated open market.

The biggest crackdowns over the past week have been in Peshawar and Quetta, both hubs for trade with neighbouring Afghanistan. With banking channels frozen in the aftermath of the Taliban takeover in 2021, massive amounts of dollars are smuggled into Afghanistan from these two cities.

While a crackdown on the black market was needed to stabilise the rupee, it “is a temporary fix”, said Fahad Rauf, Head of Research at Ismail Iqbal Securities. High inflation and chronic external deficits lie at the heart of the currency’s problem, and closing off people’s access to black market dollars risks storing up pent-up demand.

“There is an unprecedented demand for the dollar,” Hanifullah Mohmand, a trader in the Peshawar market, said. “Common people are buying dollars, fearing that Pakistan is going to default soon.”