Volatility in exchange rates: BMP underscores need for strict monitoring of banks, money market

LAHORE: The Federation of Pakistan Chambers of Commerce and Industry’s Businessmen Panel (BMP) has asked the central bank to keep on its regulatory and stern monitoring of the foreign exchange operations of the banks and money market with a view to control the volatility in the rupee-dollar exchange rates.

The BMP Chairman Mian Anjum Nisar said that it’s a positive indication that the rupee has started to appreciate against greenback majorly due to less import and partially owing to the SBP’s strict monitoring of the foreign exchange operations, suspending the operations of several branches of some exchange companies for violation of SBP regulations.

Mian Anjum expected that with controlled import bill and lower trade deficit, the rupee is expected to gradually strengthen. He said that the rupee depreciation has been overdone and driven by only sentiments. The rupee has overshot due to concerns about domestic politics and the IMF programme. The local currency had fallen by Rs52 or 23 percent in 2022 and Rs19 or 8 percent during the last two weeks on fears of delay in the IMF programme, falling FX reserves and increased political noise. However, now it has started the recovery and is likely to gain further in the coming days, he hoped.

FPCCI former president said that the actions taken by the SBP along with other good news, helped to improve the exchange rate in the inter-bank and open currency market, as the Pak rupee recorded the highest gain in absolute terms against US dollar.

He said that lower than expected imports for July and the IMF Resident Representative’s statement that Pakistan has met all prior conditions helped rupee to gain Rs12 or 5 percent to Rs226. In view of recent volatility in the exchange rate and the difference between the inter-bank rate and the rate offered by Exchange Companies (ECs) and banks to their customers, the State Bank has increased the monitoring of the foreign exchange operations of ECs and banks, leading to strengthening of the local currency, which is a positive step and it should continue further.

He said that the previous sharp drop in the rupee was seen after the government reported a five-month high current account deficit at $2.3 billion for the month of June. This took the full year CAD to a second historical high of $17.40 billion in the fiscal year which ended June 30, 2022. The massive surge in CAD was financed through the country’s foreign exchange reserves.

Accordingly, the reserves depleted to a mere six to seven-week import cover at $9.3 billion. The rupee had continued to decline along with falling reserves, he said. On the other hand, the resumption of foreign financing was at least four weeks away, as the IMF executive board was scheduled to meet and give final approval for the resumption of its loan programme to Pakistan in late August 2022.

Till then Pakistan has to manage import payments and debt repayments with the available limited forex reserves.

Mian Anjum Nisar said that this situation might create unstable economic conditions, generating higher risks, and transforms into low investment while inflation is one of the key sources of uncertainty. The high rate of inflation leaves the nation uncertain about potential investments, he added.

The BMP Chairman stressed the need for taking the economic crisis seriously, asking the authorities to form a board of economic team, including country’s financial and economic experts taking the businessmen onboard to tackle the business community’s issue on day to day basis amid skyrocketing inflation and huge depreciation of rupee against dollar.

Copyright Business Recorder, 2022