The State Bank of Pakistan Governor, Dr Shamshad Akhtar, said on Sunday that Pakistan's exchange rates regime had been determined and would continue to be determined by market fundamentals. She was addressing a press conference in SBP Board Room in the afternoon, following reports of misperceptions and misunderstandings regarding the central bank's positioning on exchange rate.
She said, "IMF has not advocated or advised us devaluation or on the exchange rate policy stance. We are not in an IMF programme. They can offer advice or conduct analysis or do surveillance, but they are not necessarily prescriptive."
She said that the debate on exchange rate adjustments had lately been re-triggered by a set of events, which included recent weaknesses in exports performance and the recent IMF Article IV Consultation Report. "There are some clarifications that are in order to set the debate in this context right," she added.
Dr Akhtar emphatically said that IMF "has not advocated", in its consultations with Pakistan, any depreciation, and rather had provided its perspective and analysis of the movements in the real effective exchange rate.
The SBP Governor said that the exchange rate assessment offered by analysts was often highly eclectic, and subjective, in nature as different approaches and methodologies offered different inferences. "The reality is that Pakistan's exchange rate regime is determined in the interbank market, and trends are influenced by supply and demand pressure for foreign exchange at a point in time and by macroeconomic fundamentals at large."
She allayed all speculative reports regarding the central bank's likely intervention in the readjustments of exchange rates. She said: "I have clarified on several occasions that the central bank is not in the business of devaluing or artificially backing the currency, but there continue to be speculations or improper interpretation and pressure on the government to manipulate and manoeuvre the exchange rate."
She said that in reality Pakistan's exchange rates regime was being determined, and would continue to be determined, by market fundamentals. "This is our philosophy, and this will be our approach. It is really the interbank market and the trends of supply and demand and the pressure along with micro-economic fundamental that shape up our exchange rates," she stressed.
She said that as is customary for the central banks, the SBP intervenes in the interbank market from time to time, but these interventions are only to reduce excessive volatility in the market, which is disruptive.
She said that Pakistan, like all oil importing countries, does face an unusual situation. "Today, unprecedented high prices have not only resulted in sharp increase in the prices we pay for oil and petroleum products about 53 percent higher in 2006 fiscal year than in fiscal year 2005, but also our oil bill in aggregate in value terms is about 66 percent higher over this period. It now accounts for almost about 40 percent of our total trade deficit."
She said that Pakistan has to pay a high price for oil imports, and the pressure created from oil import procurements does generate lumpy payments, which include high volatility that is disruptive and generates confusing market signals.
Akhtar said, "It is in this context that foreign exchange interventions for oil support involve SBP providing liquidity to the interbank market for petroleum imports to dampen the excessive market volatility."
The SBP Governor said that this action was temporary as the injections were subsequently re-purchased, but they helped in avoiding unhealthy disruptions and preventing attendant risks of speculative opportunities.
She said that exchange rate "has broad based implications" for resource allocation, trade openness, balance of payments and growth of the economy, and therefore it needed to be left to market fundamentals so that it would align itself closer to the long run equilibrium rate.
The Governor said that, given the significance and sensitivities surrounding exchange rate policy regime, it was critical for the central bank to ensure that market players understood well the exchange dynamics in Pakistan and the central bank policy stance in this area.
She said that to set the record right, the central bank abandoned fixed exchange rate regime a long time ago and moved to a floating exchange rate regime since early 2000. "While the initial years of reforms did see sharp depreciation of the rupee, with the emergence of macroeconomic stability, Pakistan has enjoyed a degree of exchange rate stability, which has augured well for restoring investor confidence," she added.
The SBP Governor said that inappropriate exchange rate adjustments could actually hurt exporters, if these raised the cost and if exporters were unable to increase prices due to increased consumption.
"The real effective exchange rate for the rupee has remained relatively stable in recent years, with a nominal depreciation being offset by an increase in relative inflation," the Governor said.
She said that in this context a better policy to support export growth would be to reduce the cost of business in Pakistan. "Thus, the SBP aims to help exporters to improve economic efficiency by simplifying processes, bettering the country's infrastructure and negotiating to improve market access."
She said that the SBP would also like to stress that current account deficits, by themselves, neither automatically lead to exchange rate adjustments nor are such adjustments always desirable.
She said, "In the light of the country's growing financial accounts surpluses and declining debt-to-GDP ratios, Pakistan is in a position to sustain higher debt levels, if necessary, to sustain the development of its economy."