After a gap of five years, exchange once again has reached at the new peak level of 70 to the dollar mainly due to the slowdown in the foreign inflows and involvement of speculators and investors.
Although, the central bank has took bold steps to bring Pak rupee at its previous level and that has resulted in a recovery of some 3 to the dollar reaching a level of 67. However, despite this revaluation it is still a question that will the Pak rupee come to its previous level of 60?
The Pak rupee stood at 59-60 at the beginning of the current calendar year, however rising import bill and dull foreign inflows mainly has pushed the rupee to the new peak level of 70 to the dollar. During the last week SBP hold meeting with exchange companies and banks, instructed them not to speculate the exchange rate.
Meeting with "A" category exchange companies warned by Governor SBP Dr Shamshad Akhtar that not to manipulate the market, otherwise their licenses would be suspended or cancelled.
While referring to recent speculative trends in the Kerb market, Dr Shamshad Akhtar, governor, State Bank of Pakistan has directed the exchange companies to keep dollar-rupee parity differential between the Inter-Bank and Kerb markets at rational levels, restrain from speculation and to focus on bringing in home remittances into the country. "This differential should not be beyond normal trends seen in the past," she told exchange companies’ heads.
In response, the exchange companies representatives gave a firm commitment to the governor that they will ensure that dollar-rupee parity differential between the Inter-Bank and Kerb market comes down to normal levels within a week. They also assured their cooperation to work with the SBP.
Dr Akhtar said that instead of curbing speculative trends, some exchange companies are playing a role in the speculation that is totally unacceptable. "You should not be led by speculation...it is the time to serve the country and not to mint money through irregularities," she added.
The SBP governor said that the whole idea behind setting up exchange companies was that these companies would play a pivotal role in attracting home remittances and in curbing activities of illegal operators.
But, she added, it has been noted that some exchange companies are themselves indulged in illegal activities. "Any evidence obtained against any exchange company would be sufficient to suspend or cancel the license of that company," she warned.
The SBP governor further stressed upon exchange companies to focus on bringing in more and more home remittances and added, “This should be the primary target of the exchange companies." Dr Akhtar said that in 2006 the State Bank had made it clear that no remittance on account of trade transactions would be undertaken by exchange companies.
However, it has been observed that a number of remittances are being reportedly made for trade settlement directly or indirectly. "SBP has taken a very serious view of it and we are going to take action against companies involved in these transactions and also in other irregularities," she added.
After the meeting with exchange companies the central bank during the last week has taken stricter measures for the revaluation of Pak rupee, banning the cash export of Pound Sterling, Euro and the UAE Dirhams and instructing exchange companies to close their Nostro Accounts abroad.
Central bank said that the basic aim of this move was to arrest the decreasing value of Pak rupee to the dollar and stabilise its value at a reason able level, besides, to control the speculation in the open market.
The State Bank of Pakistan amending in Exchange Companies Rules & Regulations has said that earlier on July 8, 2006 through a F.E. Circular No.8 Exchange Companies were required that all permissible inflows/ outflows to be routed through either their Nostro Accounts with banks abroad or their FCY Accounts maintained with Commercial Banks in Pakistan.
However, the SBP has withdrawn the facility of Nostro Account with banks abroad and instructed exchange companies that all permissible inflows/ outflows of Exchange Companies are to be routed only through FCY Accounts maintained with Commercial Banks in Pakistan.
"All Exchange Companies are therefore required to close all their existing Nostro Accounts with banks abroad and bring back the balances held in those accounts into their FCY A/Cs in Pakistan latest by May 31, 2008".
The central bank has also revised the procedure for export of FCYs other than US Dollars was prescribed. Henceforth Exchange Companies are not allowed to export cash in U.K. Pound Sterling, Euro and UAE Dirhams and instructed all Exchange Companies are required to report by 5th day of every month to the SBP.
The central bank said that failure to comply with the above instructions would attract severe regulatory action under related rules & regulations.
Commenting on the exchange rate Governor State Bank of Pakistan, Dr Shamshad Akhtar has said that central bank will not devalue or revalue the exchange rate and the market alone will determine its real value. She said that "SBP's job is to supervise the market and SBP is doing its job in a right way to stabilise the exchange rate, which is over fluctuated".
In an interview she also said that it is not "necessary" that the rupee attains its previous level of 60 against dollar. She said that the rupee had been stable over the last four to five years and was between 59 and 61 to dollar, however some shocks including imposition of emergency and political noise have caused negative pressures on the exchange rate.
The increasing macro imbalances such as rising imports and declining exports have also disturbed the exchange rate, giving an opportunity to speculators to take advantage of the situation, Akhtar added.
She said the SBP is taking measures to stabiles the over fluctuating exchange rate. But, she added SBP does not have any reversal policy and will not impose any restriction on the exchange rate. She said that SBP policy is not to devalue the exchange rate, therefore the central bank wants that market fundamentals should determine the real exchange rate.
"When we check the market it reveals that exchange companies are involve in irregularities and transferring huge foreign exchange abroad, therefore central bank stopped the export of pound sterling, euro and UAE dirham through exchange companies, Governor said. However, she made it clear that it is not a ban or reversal of any policy and said that it was SBP's prerogative to allow or disallow export.
In addition, the exchange rate on the interbank market is also over depreciate. Therefore, she added bank have been asked to correct negative sentiment in the market. "We are in a floating exchange rate regime, not in a fixed exchange rate regime. Therefore the market should determine the exchange rate," she said.
She made it clear that central bank will not tolerate any irregularity regarding exchange rate, but will continue to supervise the market. She said that exchange companies were found involved in speculation, therefore some restrictions have been imposed on them. She blamed exporters for delaying inward export receipts, while importers are covering their needs ahead of time.
She said that SBP have all reports of inflows and outflows and added that it is not a crisis situation that the central bank is facing for the first time in the history of the country. "Some 200 million-dollar inflows of earthquake victims have been received and we are expecting huge inflows from Asian Development Bank, World Bank and other resources, which would help improve the exchange rate," she said.
The Governor, said that the inter-bank and kerb markets' behavior have not been in line with market fundamentals but reflects distortions created by trading and speculative practices which often do creep in under circumstances like this.
"However, despite this situation SBP is committed to exchange rate stability and does take appropriate actions against any irregular practices, which are aimed to destabilize the markets for personal gains," she added.
She said that Pakistan is committed to exchange rate stability and there is no doubt that demand pressures have been high in the economy as manifested by the high fiscal and external current account deficits.
Since Pakistan has a managed floating exchange rate regime, the demand and supply of foreign currency sets the market exchange rate, as over the last few weeks, there has been slowdown in inflows relative to outflows, she added.
Central bank has been supporting the oil payments and other obligations of the Government as well as providing the necessary support to the market as and when required. However, the central bank is not in businesses of distorting markets by setting one level of exchange rate. As such our interventions have to be calibrated in line with the level of volatility, governor said.
However, she said that it is important for me to outline sequentially how SBP has attempted to stabilize the exchange rate.
Despite the measures taken by the SBP it is too difficult to bring the Pak rupee at its previous level of 60 to the dollar and market analyst are believing that the Pak rupee new value against the dollar would be 64-65 to the dollar.