No SBP interference in banks’ affairs results in fall of rupee

ISLAMABAD: The breakdown of communication line from State Bank of Pakistan (SBP) with main banks and currency dealers has resulted into steep slide of rupee against dollar.

It is in line with models runs by IMF on account of Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER), showing that the rupee was overvalued by 4 per cent at a time when Pakistan and the IMF were negotiating staff level agreement here last week.

When the newly appointed Governor SBP Reza Baqir took over his charge and negotiated final deal with the IMF, he took decision to further limit its informal communication line with the banks and currency dealers on the basis of argument that the exchange rate should be determined by the market on the basis of demand and supply mechanism.

When this informal communication line broke down, the inter-bank market started sliding and depreciated to 3.4 percent on Thursday.

It further slid on start of Friday but then corrected itself at a later stage. Now the monetary tightening is on cards where policy rate will be given big push of around 200 basis points (bps) in order to lure banks to lend the money to desperate borrower and that is unfortunately the government. There will be loud and clear message to banks that there will be no further hike in the discount rates after this upcoming hike in discount rate of around 200 basis points from existing 10.75 percent. The banks will be asked to come forward to participate in the long term investment venture of PIBs instead of investing only in short term T-bills.

Around 70 percent short term domestic debt has turned into maturity period of one year mostly on three and six month basis. In the aftermath of restrictions on getting borrowing from the SBP under the IMF program, the government will be forced to shift its reliance on credit line from banking sector.

The economic indicators do not justify any steep hike in discount rate because the inflation has receded down and stood at 8.4 percent in April 2019.

The core inflation has come down to 7 percent in April 2019 against same level backed in the same month of last year. However, the policy rate has gone up by 475 basis points in last one year. With this recent increase in POL products, the inflation in next month may touch 9 percent but the depreciation of currency’s impact will take some time to translate into inflationary pressures.

The background discussions with key policy makers also conceded that the incumbent regime lacked communication strategy to present its narrative on the economy in the aftermath of the staff level agreement with the IMF, resulting into rife in speculations. When contacted to SBP’s spokesman on Friday and asked about fluctuation in exchange rate, he replied that the exchange rate movement reflected demand and supply conditions in the foreign exchange market. “It will help correcting the market imbalances,” he concluded.