The continued volatility in the exchange market has forced State Bank of Pakistan to take some measures aimed at reducing pressure on Pak Rupee (PKR). Not only did State Bank on Tuesday release a detailed statement on recent development in the exchange market, its officials also held a meeting with exchange companies to review the volatile situation in the exchange market. During the meeting, SBP vowed to ensure sufficient dollar supply to the exchange companies to stabilise the foreign exchange market and reduce pressure on Pak Rupee.
SBP has also said that recent developments in the exchange market are in line with economic fundamentals. From the last few days, Pak Rupee is under pressure due to rising demand of greenback, which was being traded at Rs 107.40 in the open currency market on Tuesday morning. After continued instability in the exchange market, SBP on Tuesday evening called an urgent meeting of exchange companies and offered adequate supply dollar as per their requirement with a view to reducing the supply and demand gap.
The meeting was chaired by Syed Irfan Ali, Executive Director Banking Policy and Regulation Group, and attended by Muhammad Ali Malik Executive Director EPD SBP, Zafar Paracha General Secretary Exchange Companies Association of Pakistan (ECAP), Malik Bostan President Forex Association of Pakistan, Ijaz-ur-Rehman and others. During the meeting SBP officials expressed their concern on sudden increase in the US dollar rate and said that there is no justification for such increase in open currency market. They urged exchange companies to keep themselves away from illegal activities and not to involve in speculation, otherwise a strict action will be taken against them. They said that there is no plan of Pak Rupee devaluation and SBP will ensure sufficient supply of cash USD to reduce pressure on Pak Rupee.
Sources said that SBP has ensured that banks will supply dollar at Rs 105.90 to the exchange companies and they can sale it at a maximum rate of Rs 106.20 in open currency market. Besides, SBP has decided a strict monitoring of exchange market to prevent speculation.
Meanwhile, SBP in a statement said that during the past couple of days the Pak Rupee has been once again facing speculative pressures due to some reports that criticised external borrowing of government and the quality of reserves of the country. SBP said that these reports/articles are highlighting just one aspect of the debt dynamics without contextualizing it in Pakistan's current performance and the overall macroeconomic stability. Further, reference to reports by international rating agencies, such as Moody's, is also being made conveniently ignoring the strengths of the economy highlighted in the same report, it added.
"It would be pertinent to mention that the current level of exchange rate is broadly in line with the economic fundamentals of the country. It is consistent with the improved external position of the country, achieved through contained external current account deficit at low levels, continued surplus in overall balance of payments of the country and built-up of foreign exchange reserves to historic high levels," SBP said.
SBP expects the external position to continue to strengthen and stands ready to take any measure to ensure stability in the foreign exchange markets. While referring to Moody's reports, SBP said that Moody's recent assessment has been overlooked, which noted that "the support from multilateral and bilateral lenders bolsters an improving foreign reserve position and ongoing reform progress". Moody's have also mentioned that while Pakistan's government financing is mainly from domestic sources and system-wide external debt is declining as a percentage to GDP, the level of public debt poses a moderate degree of credit risk.
It may be noted here that Pakistan's external debt obligation has actually decreased from 33 percent of GDP in FY10 to 23 percent at the end of FY15. Similarly, despite stagnant exports, the external debt to exports ratio has declined from 300 percent in FY10 to 255 percent in FY15. Further, Moody's have appreciated the progress on structural reforms undertaken by Pakistan, SBP said.
Borrowing externally is necessitated by trends in balance of payments in general and trade deficit in particular. With shrinking of the current account deficit and with surplus in capital account, Pakistan's overall balance of payment position has contributed to the build-up of external buffers.
State Bank mentioned that presently its foreign exchange reserves are now over $15 billion, sufficient to cover four months of imports, which is a marked improvement from 2013 when these were only $3.9 billion. Apart from privatisation proceeds, spot purchases from the interbank market amid falling oil prices and rising workers' remittances, the Coalition Support Fund, and multilateral and bilateral inflows, increase in foreign exchange reserves has also come from external borrowing, including that from international capital markets, it added.
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