The State Bank of Pakistan (SBP)’s interim monetary measures failed to control continuous depreciation of Pak Rupee against the dollar and has compelled it to take further steps to provide a safeguard to rupee.
The SBP took some interim monetary measures in the last week of May 2008 aimed to maintain the Pak rupee at a reasonable rate, which was continuously on a downward side since April, reaching lowest level of some Rs69.50.
As a step in this direction, SBP instead of July 2008, took interim tight monetary measure on May 22, 2008 by imposing 35 per cent Letter of Credit on all imports excluding oil and food items, besides increasing the discount rate by 1.5 per cent to 12 per cent.
Although these steps help to stabilise the exchange at Rs67-67.50 against the dollar, however, Pakistan rupee could not recover it’s previous level of Rs61-62 to the dollar.
The interim measures also could not witness long-term positive results and in the first week of July Pak rupee again depreciated and reaching about Rs74 against the dollar. 
Therefore, the central bank on July 8, 2008, took tight measures to safeguard the Pak rupee from the further decline against the dollar, however, further action by the central bank depicting the earlier taken measures were not fruitful, as Pak rupee was depreciating in Interbank as well as at the open market.
In line with the new measures for stabilising Pak rupee, the State Bank of Pakistan announced that it will now made 100 per cent oil payments and suspended the afternoon dealing by Banks Treasuries all types of Foreign Exchange Transactions.
The SBP also has suspended Forward Cover Facility (FCF) against imports and advance payment against imports cut to 25 per cent with immediate effect to rationalise the foreign exchange markets.
Amending in Exchange Companies Rules and Regulations, the SBP has further strengthened monitoring mechanism of transactions made through Exchange Companies.
The SBP said that earlier authorised dealers were allowed forward booking of dollar against imports on Letter of Credit (L/C) basis.
However, at present it has been decided to temporarily suspend forward booking against all types of imports, therefore authorised dealers have been directed not to sell foreign exchange on forward basis against imports.
However, the SBP has allowed dealers to honour their commitments already made in accordance with the terms of related contracts subject to compliance of related rules and regulations. 
In another step the central bank has reduce the limit of advance payment against the imports. The SBP has now decided that the said facility will be available only to the extent of 25 per cent of the FOB or CFR value of the goods to be imported.
Earlier, importers were allowed to effect advance payment to the extent of 50 per cent of the FOB or CFR value.
Changing the policy regarding payments against import of POL products, the central bank has now decided that State Bank of Pakistan will provide foreign exchange to the authorised dealer for the import of all categories of Furnace oil and also against the above mentioned Form ‘M’ approvals.
The SBP will also continue to provide foreign exchange to Banks for the import of all other POL products including those specified in point No.1 & 2 above (as per EPD Circular letter No.12/Policy-2004 dated November 01, 2004).
While previously all purchases of foreign currency related to the import of Furnace oil were to be made by the authorised dealers from the Inter-Bank market.
To maintain the Pak rupee on a sustainable level the SBP has also reduce the time for all types of Foreign Exchange Transactions by authorised dealers with their customers and in the Inter-Bank market up to 2 pm Monday through Thursday and up to 1 pm for Friday and Saturday.
Authorised dealers are, however, allowed to transact foreign exchange swap transactions in the Inter-Bank market up to 4:30 pm Monday through Friday and up to 1 pm on Saturday.
Inter-Bank swaps would include normal swap transactions involving two simultaneous transactions with the same authorised dealer and exclude any structured Foreign Exchange Swaps i.e. two outright transactions with different authorised dealers.
Similarly, the SBP has said that henceforth Exchange Companies including (A and B category) will be required to take prior approval of State Bank for all transactions of $50,000 or above (or equivalent in other foreign currencies) on account of outward remittances or sale of foreign currencies to the customers.
However, this requirement will not be applicable on sale of foreign currency to the banks and exchange companies, the SBP added.
Accordingly, the central bank has advised Exchange Companies to forward their related requests to this department along with complete details of the transaction including particulars of the customer like name, address, CNIC, amount and purpose of the transaction.
The SBP has made it clear that failure to comply with the above instructions will attract severe regulatory action under related rules and regulations.
Meanwhile, Governor SBP Dr Shamshad Akhtar clarifying the whole situation said that SBP is continuing to support the rupee to ensure exchange rate stability.
“As a step in this direction, SBP had tightened monetary policy on 22 May, 2008 and this was packaged with the imposition of 35 per cent L/C margin on non-oil and non-food imports,” she added.
He said that the SBP measures helped infuse a degree of exchange rate stability during the last few weeks of FY08 exchange rate stabilised to an average of Rs67.50.
 
Industry, however, appealed for withdrawal of the L/C margins to allow for import of raw material and intermediate goods for a number of industries, governor said.
SBP had requested the Industry and Commerce chambers that the withdrawal of L/Cs was being accommodated on the basis of understanding that industry would import the most vital and essential imports for their industry and will refrain from forward booking of imports.
However, in the last few days the level of forward booking for imports has been high, while the export proceeds have been delayed. The posture of market participants is causing complications in the smooth functioning of foreign exchange market.
In general, the import demand and other requirements have resulted in significant outflow of foreign exchange from the market, while inflows and supply of foreign exchange remained low, she said.
Exchange rate is mainly determined by market forces of demand and supply without any specific target level of the exchange rate, however, SBP does and has intervened in the foreign exchange market to reduce excess volatility, prevent the emergence of destabilising speculative activities and develop an orderly foreign exchange market, she explained.
Demand for the dollar has increased mainly due to the tremendous increase in imports. January-May 2008 saw imports increase by 51 per cent over the corresponding period last year.
The governor said that on the supply side of foreign exchange market, Pakistan received less inflow than expected. Between January and May 2008, exports rose by only 22 per cent, while foreign direct investment and portfolio investment also fell compared to the same period in 2007.
In May 2008, speculative activities came to a head, leading to a quick decline in the value of the rupee. The SBP took a number of interim monetary policy measures in response, including the imposition of higher interest rates, stricter L/C margins, increased reserve requirements, and enhanced regulation of foreign exchange companies, which stabilised the exchange rate to an extent, with the rupee witnessing some appreciation.
“However, on account of the continued political uncertainty, shortfall in the foreign exchange receipts in the last quarter of FY08 and the exemption of several items from L/C cash margin requirement; pressure on the exchange rate has re-emerged in the first week of July,” she said.
In the first eight days of the current fiscal year PKR has depreciated by 6.6 per cent consequently, in order to arrest this recent fall in the value of the rupee, which is largely a reflection of market sentiments, the SBP has taken serious measures.