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March 25, 2019

Govt to give SBP more autonomy

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March 25, 2019

ISLAMABAD: The International Monetary Fund (IMF) has classified Pakistan’s existing exchange rate as ‘stabilized arrangement’ and asked Islamabad to move towards adopting a market-based flexible exchange rate with a strong, transparent and accountable central bank as exists in other emerging markets of the world.

In a bid to comply with the IMF demands, the PTI government is considering giving the State Bank of Pakistan (SBP) greater operation and institutional independence. “In this context, the State Bank Act would be amended to give the central bank more autonomy and clarify its objectives and functions. Specifically, the government, in consultation with the SBP and other stakeholders will finalise proposals to facilitate implementation of flexible inflation targeting as envisaged in the SBP Vision 2020,” said the official sources.

The existing exchange rate arrangements and possible limits of government borrowing from the SBP would also be clarified in line with prioritising price stability as an objective of monetary policy, they said.

“In addition, the SBP’s governance structure will be reviewed with an objective to enhancing accountability in the SBP, while at the same time providing greater legal protection to the governor, deputy governors and the board of the SBP” added the sources.

With adoption of market-based flexible exchange rate, the IMF wants no intervention of the State Bank of Pakistan (SBP) into the market, as such mechanism would be developed under which the central bank would have to bring its intervention into currency market at zero by end of every quarter.

“Nonetheless, it is not about what the IMF wants but it is about what is the best for Pakistan and saving the country from running into recurrent macroeconomic imbalances time and again,” said the official sources quoting the IMF staff team. The IMF finds out that consistent intervention of the central bank had eroded hard-earned macroeconomic stability and it resulted into evaporation of foreign currency reserves.

The currency market witnessed slight depreciation of rupee against dollar end of last week where rupee depreciated by 70 paisa and crossed Rs140 against US dollar in the market. It is expected that some slight adjustments will continue in coming weeks.

The Ministry of Finance spokesman had denied that there was no target fixed with anyone on exchange rate and Pak rupee was at equilibrium keeping in view SBP’s model on real effective exchange rate.

With this IMF demand to adopt flexible exchange rate, the State Bank of Pakistan will have to carefully manage the exchange rate to bring it in line with the real effective exchange rate (REER). There might be some slight adjustments through adoption of this mechanism but the free fall of rupee would not be allowed, as Pakistan’s currency market is very thin and free float could pose serious risks of knee jerk approach on wishes of speculators.

Pakistan’s renowned economist Dr Hafiz A Pasha Sunday said a flexible exchange rate carefully managed by the SBP could provide solution under the IMF program but he sternly opposed that Pakistan’s currency market could not afford free float as it could be a recipe for disaster.

The IMF’s Annual Report on Exchange Arrangement and Exchange Restrictions (AREAER) states that Pakistan’s exchange rate could be categorized as “stable arrangement”. The IMF’s classification as a stabilized arrangement entails a spot market exchange rate that remains within a margin of 2 percent for six months or more (with the exception of a specified number of outliers or step adjustments) and is not floating.

The required margin of stability can be met either with respect to a single currency or a basket of currencies, where the anchor currency or the basket is ascertained or confirmed using statistical techniques.

Classification as a stabilized arrangement requires that the statistical criteria are met and that the exchange rate remains stable as a result of official action (including structural market rigidities). The classification does not imply a policy commitment on the part of the country authorities.

The sources said free float is adopted by Mexico while flexible exchange rate exists in Turkey. There are many emerging economies which are moving towards market-based flexible exchange rate as the central bank possesses certain powers to intervene but not at the cost of protecting local currency at overvalued rates.

In background discussions with the IMF and Pakistani officials on the condition of anonymity, they said the IMF was not asking any new thing on exchange rate, as the IMF staff was recommending this for years.

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