Rupee in free fall

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This week saw a dramatic rise and fall and then again rise in Pakistani Rupee’s value against US dollar. It started on Wednesday when the USD jumped to 108 PKR merely two hours after trading began, then it came down in the evening but jumped again next morning. This unusual trend did not only baffle the reporters but traders were also at a loss explaining it. To add more into a confused affair, State Bank of Pakistan and Finance minister offered completely opposite views. SBP chairman said that it was a positive development resulted from the loose control that the State bank was having over monetary regulation whereas, Ishaq Dar said that this decline in Rupee’s value was unnatural and purposefully engineered by some insiders. Now that it has been clarified that the sharp decline occurred because of the fact that the State Bank suddenly stopped intervening in the currency markets on that morning.
The State Bank has many tricks up its sleeves which it can use to control the exchange rate. The most widely used tool is to buy and sell dollars from the interbank market. The problem with this approach is that it is contrary to market principles of exchange rate management, and since we claim to have a market determined exchange rate, regular interventions of this sort will belie that claim, triggering alarm bells at the IMF and causing foreign creditors to become concerned. The subtlest of them all is a simple phone call from the State Bank to the treasurers of major banks. As the rate begins to rise and hit an informal ceiling, a phone call will come to the treasurer from the State Bank instructing the concerned bank to not buy at that rate. This will give out an impression that the currency is stable at this level. The word in banking circles is that they received the following answer “we are under instructions to let the rupee find its own value”. Suddenly the soft supports that had lain below the rupee vanished.
So the million-dollar question here is that who issued the instructions on Wednesday to let the Rupee keep sliding. Was it an economic decision made at higher levels within the State Bank? Or was it a political decision, conveyed to the State Bank from Islamabad? The move was inevitable for almost two years now, and as our exports have floundered and imports continued to rise, it became more and more inevitable. If the government wants us to believe that its difficulties with the JIT have caused gyrations in the currency markets, you should know that things don’t work like that. This was an engineered event, and we need to know who the engineer was. By itself a currency depreciation is not a bad thing, and if the rupee remains at the level that it found on Wednesday, it will help rectify a distortion in our external account. Rather than make a big deal of the depreciation itself, it would be better to ask on whose instructions the various supports were pulled away from the rupee.

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