Relaxation foils reforms

LAHORE: Decline of rupee after almost four weeks of appreciation against the US dollar, despite clear indications that the currency is still undervalued, proves that market players are not prepared to follow rules and resorted to manipulation as soon as the watchdog relaxed a bit.

The regulators are managing currency movement prudently with a clear target of bringing its value down to Rs250. But a massive decline in dollar value would have disrupted the economy.

This sudden appreciation of the rupee would have hurt both importers and exporters.Exporters are now expecting they would get orders at around Rs250 against the dollar, while the importers would sell their imported goods based on expected new value of the dollar.

This system was moving on autopilot up till some banks decided to make a few quick bucks by suddenly increasing the value of the dollar amidst demand from importers. Many banks that indulged in similar practices in the past were let off the hook by the regulator after imposing minor fines, which were much less than the gains made by those banks via illegal manipulations.

Only time will tell now how the regulator deals with the current manipulative practices of banks and some money changers. The penalty must be high enough to really hurt their financial situation.

We must not forget that the US authorities fined one branch of one of our largest banks operating in the United States with a fine that almost wiped out its yearly profit. Actions like that are the best deterrent to stop any illegality in financial dealings of the commercial banks.

In fact, it is the absence of accountability that encourages businesses to bypass laws and indulge in unethical practices. As far as the rupee value is concerned, it is a rough estimate that its real value is Rs250.

This was based on the flight of dollars on a daily basis to Afghanistan. The impact of restriction on Afghan transit trade and the actions against smugglers would put further pressure on dollar value.

These actions have recently been initiated and would take time to yield results. Then the impact of under-invoicing that is now being checked has also not been taken into account. Under-invoicing by some counts is to the tune $10 billion of which 60 percent generates from China.

Any opposite movement in rupee-dollar value before achieving the Rs250 target could prove to be extremely counterproductive for the economy. It will upset investment plans of many companies as well as stop foreign buyers from placing orders with Pakistan exporters.

Thus, traders and domestic manufacturers would delay the planned decrease in

prices. For instance car manufacturers that have largely kept the prices high despite regular devaluation of dollar have just started announcing some reductions in car rates.

However, major players are waiting for the dollar to at least touch the Rs260 level. They expect this level to be achieved (at current downward trend in dollar value against rupee) by November 15.

Rule-based governance always has a salutary impact on the economy, particularly if it is accompanied with full accountability. The distractors of law would then think twice before going out of line.