State Bank of Pakistan Governor Dr Shamshad Akhtar on Monday said that the interbank and kerb market behaviour has not been in line with market fundamentals and reflects distortions created by trading and speculative practices which do creep in under the circumstances like the one we are experiencing today.
"However, despite this situation the SBP is committed to exchange rate stability and does take appropriate actions against any irregular practices, which are aimed at destabilising the markets for personal gains," she added. Commenting on the current exchange rate, Shamshad 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 past few weeks, there has been slowdown in inflows, she added. The central bank has been supporting the oil payments and other obligations of the government as well as providing 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, the governor said. She said it is important for me to outline sequentially how the SBP has attempted to stabilise the exchange rate.
First, the central bank has been working closely with the government to set in place a macroeconomic framework to ensure its sustainability. In addition, we are taking concrete steps to ensure effective supply of foreign inflows. In discussions with multilateral agencies and other sources, there is a broad agreement for their support, which should be able to bring in quick disbursement of foreign exchange inflows.
Moreover, the government is looking at other options to attract foreign inflows. We are optimistic that these inflows will start pouring in the next few weeks, which should settle the supply and demand dynamics more sustainably in the markets, she informed. "Secondly, we have been and are ready to supply the necessary liquidity and lubrication to the markets through calibrated intervention," Shamshad added.
While the central bank has enhanced its vigilance of the interbank and kerb markets and this vigilance is unearthing some issues, which are being addressed. At one point since the kerb and interbank market rate differential was higher, in consultation with the exchange companies; SBP agreed to provide them with some liquidity which was received well by markets.
Now, we are working with the exchange companies and have kicked off reforms to ensure that they serve Pakistan's interest effectively. The governor said that during the last few days the central bank has taken some measures to stabilise the exchange rate. The exchange companies have been directed to close all Nostro accounts abroad.
Besides, the exchange companies have been encouraged to focus on promoting home remittances. The companies can only effect outward remittances to the extent of 75 percent of the home remittances mobilised by the respective company, she added.
In order to meet the demand of foreign currencies within Pakistan, the exchange companies have been directed to surrender their surplus foreign currency to the State Bank. Earlier, exchange companies were exporting most of the foreign currency, except dollars abroad. Now exchange companies, besides dollar, will not be able to export pound sterling, euro and UAE dirham, Shamshad said.
Exchange companies have been required to surrender a minimum of 15 percent, instead of earlier 10 percent, of foreign currencies received by them from home remittances to the interbank market.
Now advance import payments will only be allowed against letter of credits and that too only to the extent of 50 percent Advance payments against contracts are not allowed. Last year, advance payments against letter of credits and firm registered contracts were allowed to importers via banks to the extent of 100 percent, she added. She said some reforms of the forward hedging mechanism available to importers, exporters have been introduced to ensure that there is no misuse of the facility other than true hedging.