Financial policy stand-off: MoF, SBP disagree on exchange rate issue

A government bank purchases $100m, creating panic in the market.



The stand-off among the Ministry of Finance (MoF) and State Bank of Pakistan (SBP) became serious on Thursday when Ishaq Dar through a press conference announced to launch an inquiry into why the rupee plunged 3.1 per cent on Wednesday.

The concerned officials of the central bank refused to comment on this issue, but the sources said, “The decision of Pak-rupee devaluation was taken by the SBP as the ministry was not paying heeds towards the economic situation of the country.”

An SBP source said, it was the right decision of the SBP to devalue the local currency as the current account deficit had touched $ 10.641 billion in 2016-17 compared to $ 4.586 billion previous year, while the trade deficit of full year stood at $ 23.661 billion.

The central bank had sent several reminders to the ministry of finance in the past to regulate the greenback price in the interbank market the sources said, adding that there was a silence each time.

An industry source claimed that a government bank purchased $ 100 million in the morning from the interbank market, which created a panic after which the major banks held their dollars. The same day, there was also a rumour in the market that the central bank is going to depreciate the Pak-Rupee.

However, the SBP confirmed on Wednesday through a statement that the Pak Rupee-US dollar exchange rate in the interbank market has depreciated by 3.1 percent from Rs 104.90 per day before-yesterday to Rs 108.25 per dollar yesterday.

All of the mess happened as there was no head of the central bank for last two months, but Ishaq Dar Thursday informed that a new central bank governor would be appointed within two days.

Dar said there was no justification for such a sharp drop, contradicting a statement by the country’s central bank, which backed Wednesday’s fall in the rupee and said an exchange rate of 108.25 against the dollar would ease balance of payments pressures.

Analysts said the State Bank of Pakistan [SBP] had effectively allowed the Pakistani rupee to devalue by 3.1 per cent after nearly two years of being stable at about 104-105 rupees to the dollar.

In this connection, Ishaq Dar has also called a meeting of the presidents of the major banks Thursday and started an inquiry against the devaluation of the Pak rupee. He said an individual cannot take the decision of devaluation of the local currency. Only the finance ministry can do it.

Dar said the government will take actions after the inquiry report is received, but did not specify what steps might be taken. “I don’t believe that any individual has this kind of authority to make such a big decision to make an artificial adjustment, and I am calling this artificial,” he added.

He did not say if Riaz Riazuddin, the acting governor will be in the running for the job, but till the filling of this report, he is working on same position.

The SBP in its statement had claimed that almost all macroeconomic indicators have been showing encouraging picture, such as decade-high real GDP growth, increase in investment, credit expansion to private sector, and subdued inflation. Also, the deficit in the external account has been rising for some time, the SBP said in a statement.

Accordingly, the exchange rate adjusted in the market and SBP is of the view that this depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country.

The analysts and International Monetary Fund (IMF) had been forecasting the devaluation of the Pak-rupee for last several months because of rising trade deficit and current account deficit.

The sources in the banks informed that the dollar is being trade above Rs 105.50 to 106-30 on Thursday’s evening compared to Rs 108.35 on Wednesday. “The banks are offering dollar at lower rates following the notice taken by the ministry of finance,” an industry source claimed. The dollar would come back on its previous position, he added.

The central bank had already lost $2.7 billion from their peak in October 2016 owing to slower project-loan inflows (70 per cent disbursement of the budgeted amount from multilateral donors in 2016-17), an analyst of AKD securities said.

The rupee/dollar parity depreciated primarily reflecting ongoing deterioration in FOREX reserve position due to rising trade imbalances and slower foreign loan inflows.

The analyst said FOREX reserves will stabilize above $19 billion in 2017. The currency will largely consolidate around Rs 106-107 in 2017 – though reliant on materialization of planned foreign inflows on a timely basis, he added.

The experts said if the dollar moves up than Pakistani economy – which was showing stable in the international market – will collapse and prices of all commodities would automatically increase in local markets.