Rupee’s fall: a coordinated exercise

The March 20 rupee depreciation of around four per cent against the US dollar has removed, once again, any doubts about a smooth working relationship between our fiscal and monetary authorities.

The rupee closed at Rs115/dollar in the interbank market on March 20, down from Rs110.58 on March 19, adding Rs4.42 to each dollar. Bankers said and the State Bank of Pakistan (SBP) confirmed in a press release before closing at Rs115. The rupee even witnessed an intra-day low of Rs116.25/dollar.

Reminding markets of the rupee depreciation of December 8, the SBP said: “As enunciated in the December 2017 press release, SBP believes that the exchange rate movements will continue to reflect the demand-supply conditions in the foreign exchange market.” But it warned that it would continue to closely monitor forex markets “and stands ready to intervene to curb the emergence of speculative pressures.”

Well-aligned: On December 8, the central bank had withdrawn support for the rupee and let it fall 4.3pc against the dollar in the following six days. But then markets had seen the move as the natural outcome of a tiff between the Ministry of Finance and the SBP.

Months earlier, then Finance Minister Ishaq Dar had audaciously reversed the July 5 SBP move to allow 3.15pc rupee depreciation, by refusing to defend the then prevailing exchange rate band in the interbank market.

Between July 5 and December 8, markets remained in the grips of uncertainty. And even after that uncertainty went away in December, markets didn’t know when exactly the rupee would lose more of its extra weight following a clear nod from fiscal and monetary authorities.

“Exchange rate adjustment subsequent to announcement of a tax amnesty scheme (for retrieval of tax-evaded money stashed abroad) points towards a clear alignment in the actions of the SBP and the government”, says a senior executive of Faysal Bank.

“Even if the amnesty scheme can help bring in a few billion dollars, it will help ward off future pressure on exchange rates and timely rupee depreciation can be an incentive to those who would bring their money back home.”

Rationale, Ramifications: After 4.3pc depreciation in the second week of December, the SBP was defending the rupee in the interbank market, forex dealers say. A gradual decline in forex reserves meanwhile prompted the central bank to stop the practice and let the market re-determine the rupee-dollar parity one more time.

SBP’s net forex reserves declined to $11.944 billion on March 16, from $14.107bn at end- December, a significant erosion of 15.3pc in just two and a half months, central bank data reveals. Boosting sagging SBP reserves is a must to keep them adequate enough to cover at least three months of imports i.e. at least in excess of $14bn.

The central bank normally avoids being a net seller of dollars in the interbank market towards the end of a quarter, as a matter of discipline and to keep a cushion for foreign debt servicing obligations.

“A cumulative 4.3pc fall in the rupee value in the second week of December and now a further fall before the close of this quarter does make sense (in the context of reserves cushion for meeting obligations),” says treasurer of a local bank.

The central bank can and does make local currency/ foreign exchange swap deals with banks normally keeping such factors in mind. If the central bank now wants to enter into a rupee/dollar swap for three months from now, some banks are long in forex positions, senior bankers say. On March 16, forex reserves held by banks totalled $6.135bn.

Fiscal Discipline: Fiscal discipline calls for uprooting corruption, facilitating free and fair interplay of the market forces, keeping the budget deficit in check, limiting local and external borrowings of the government, creating more fiscal room for development projects, ensuring fuller exploitation of tax revenue generation and running state-owned enterprises profitably.

Since the country could not maintain fiscal discipline, it saw a gradual weakening of the external account: a widening current account deficit and expansion in external debt and liabilities that eventually necessitate exchange rate adjustments.

Coordination: Greater and deeper fiscal, monetary coordination is a must to address this issue especially during transitory periods. The period between the change of political guard and general elections is one such period of transition of immense consequences.

“That the rupee rate adjustment has come even before the installation of a caretaker government shows our leadership has become more sensible,” comments a former deputy governor of SBP.

“The Ministry of Finance could have resorted to reasoning of one kind or the other to convince the SBP to withhold the rupee depreciation till the final days of this government. However, that would not only have delayed the accruing benefits of the move but would also have created problems for the next government.”

from The Daily Mail International – Leading English Newspaper from Pakistan https://ift.tt/2GGpBeX