SBP started the flexible exchange regime in 2019. At the time, the PKR/USD level was 160. The currency oscillated between 152-178 between Jul-19 to Feb-22 with an average exchange rate of 162. The market was working just fine. Then came a mega-crisis – both economic and political. The dimensions were both domestic and international. Since March 22, the currency is extremely volatile, and the general direction is one of steep depreciation where the rupee almost touched 240 twice against the dollar, currently standing at 218.

The core reason for this volatility is shortage of dollars; with political uncertainty as icing on the top. SBP took all kinds of administrative measures to bring a balance in the currency market. The central bank has asked the banks to arrange foreign currency to meet payment requirements. SBP has asked the banks to run net open position (NOP) short. And they were supposed to cover it by themselves? In the process, they asked for higher rates for buying. Today these banks are scrutinized for behaving independently while they were forced to do so by the central bank. Why did the SBP not intervene when the banks were running high spread?

Banks usually don’t run propriety positions. They are facilitators between buyers (importers) and sellers (exporters). The selling was less while buying demand was huge. SBP asked the bank to handle it. Since the market was short, the price moved up. A similar example of this phenomenon is the recent shortage of surgical mask in early days of COVID. It was selling at multiples of its normal price. That was happening in the spread of banks in the currency market. If the banks were manipulating, why didn’t the SBP ask banks to stop at that time?

The banks used to run wide spreads as they had short NOP. They were pricing the risk, as SBP was not providing the dollar. Everyone was pricing at high risk to cover shorts. This was all happening under the nose of the SBP and today when the banking profits are published, everyone is criticizing banks for manipulation and SBP has joined the crowd.

Didn’t the SBP know this? Isn’t SBP the prime responsible agency for anything related to the currency market? Whom would you blame when the law and order is bad? Of course, the authorities. Here SBP is the authority. If the macroeconomic situation gets worse, finance minister is the first to get hit. Similarly, in case of exchange market manipulation, the buck stops at SBP – the regulator. Not banks.

There are handful of commercial banks in Pakistan, and majority of banking is being done by just top ten banks. SBP is the most resourceful regulator in the country; and its main mandate is to regulate only a few banks. The interbank currency market is thin and not many transactions happen a day. SBP can keep track of all the transactions. The question is where was the SBP when the L/Cs were opening at 245 while the interbank market was in 230s. Why did the SBP have to wait for banks quarterly accounts be published and being circulated and criticized in the media before taking any actions?

The case here is to not defend banks. They could have manipulated. There are incidences where they were giving Rs7-10 discount to remitter and small exporters while charging Rs7-10 premium to importers. They milked it. The numbers are showing it. But they took the naked risk. There was no SBP to support them and had kept a blind eye on their manipulation (if any). And now the regulator is showing strong teeth. The balance is missing.