SBP guards market-based exchange rate system to fight off external finance risks

KARACHI: The State Bank of Pakistan (SBP) on Monday defended the market-based exchange rate system that it said staved off external finance risks in the past couple of months, reiterating its resolve to intervene in the market to check ‘excessive volatility’ and ‘disorderly conditions’.

Governor SBP Reza Baqir said currently market-based system is implemented in Pakistan, which protects exchange rate from manipulation and simultaneously follows demand and supply mechanism.

“Neither fixed not free-float regime of exchange rate is good for Pakistan, as former can lead to external imbalance and latter can lead to manipulation,” Baqir said, addressing a presser on economic outlook and the role of SBP.

Governor SBP said current account deficit started deteriorating and reserves were falling due to fix exchange rate regime. “After recent depreciation, the country has seen substantial decline in the current account deficit,” he said. “Pakistan has started getting benefit from currency devaluation in form of increase in export volumes. Further, imports are down which eventually promotes import substitution.”

Baqir said the current account deficit has been contracting since the exchange rate depreciation. The current account deficit narrowed 29 percent to $9.6 billion in the July-March period of 2018/19. The government expected current account deficit to cut by $7 billion during the next fiscal year.

The rupee plumbed record lows after what the traders and analysts believed the central bank pulled support to arrest decline in the rupee. It was seen as a transition to a free-floating rate when the market determines a balance exchange rate on the basis of demand and supply. The rupee has lost about 10 percent this year, after falling 38 percent in 2018. The rupee remained under pressure on Monday. It closed at 156.96 per dollar in the interbank market compared with previous close of 155.84.

Currency dealers said the central bank pulled support to get an approval from the International Monetary Fund’s (IMF) board for a $6 billion bailout package. The IMF board is to meet on July 3 to decide on the loan program that is attached with prior actions that include market-based exchange rate.

Baqir said the central keeps close eye on market and if there is an excessive volatility the central bank would intervene. “We will continue to do so.”

The central bank governor said there is a two-way movement in market-based regime. The exchange rate was appreciated in May due to surge in inflows on Ramazan and ahead of Eid. Firms have to close their books before June-end and they purchase dollars from the market to pay import bills.

This puts pressure on dollars outflows. Previously, the country adopted a fixed exchange rate system. “There won’t be any suppression to encourage investments,” he added.

Baqir said the exchange rate regime should be seen as part of broader economic reforms. Moreover, exports reforms such as issuance of exporters’ refunds and improvement in ease of doing business are also important in order to increase exports, he added.

Governor SBP said the government won’t borrow from the central bank as it is inflationary. “Government will now borrow from market rather than SBP to prevent inflationary pressure on economy.”