The rupee slid 3.1 percent against the dollar on Wednesday tumbling to a low of 108.00/20 rupees to the dollar against 104.9 rupees to the dollar a day before in an apparent devaluation. Political pundits linked the dramatic depreciation to the Prime Minister's daughter's appearance before the Joint Investigation Team (JIT) as the reason for the loss of confidence in the local currency; while Federal Finance Minister Ishaq Dar expressed "deep concern and indignation" at what he claimed was an 'artificial' drop. The State Bank of Pakistan (SBP), in what is clearly an unprecedented dismissal of Dar's rationale issued a statement maintaining that the exchange rate is "broadly aligned with the economic fundamentals and the current changes are attributed to a rising external deficit".
In this context, it is relevant to note that Pakistan's economy has been experiencing a steadily rising current account deficit and, disturbingly, recently uploaded SBP data suggests that the July-May 2017 current account deficit of 8.92 billion dollars was an underestimation and actual deficit for the period is 10.64 billion dollars or 1.71 billion dollars higher. This revision has come in the wake of the much-needed rationalization of import data between the SBP and the Pakistan Bureau of Statistics which is under the administrative control of the Ministry of Finance. The rupee fall is, therefore, expected to have a beneficial impact on exports and discourage imports.
That the Finance Minister never did grant the SBP the autonomy in spirit - a commitment that was a time bound structural benchmark under the three-year Extended Fund Facility (August 2013-August 2016) by the International Monetary Fund - is evident from a press release uploaded on the Fund's website dated as recently as 16th June 2017 titled the IMF Executive Board concludes Article IV consultations with Pakistan wherein it is stated that the Board members "noted that monetary policy has been appropriately accommodative, and urged the State Bank of Pakistan (SBP) to remain vigilant and be ready to tighten it in case inflationary pressures emerge or foreign exchange market pressures intensify. Directors called on the authorities to allow for greater exchange rate flexibility-rather than relying on administrative measures-to help reduce external imbalances and bolster external buffers... Directors welcomed ongoing progress in strengthening central bank autonomy, and called for implementing the remaining recommendations from the 2013 Safeguards Assessment and to phase out government borrowing from SBP".
Not deferring to the Finance Minister's flawed rationale, a rarity during the Sharif administration, can be sourced to the fact that the institution is currently not headed by a Dar appointee but by an Acting Governor, Riaz Riazuddin, since 2nd May 2017 who is a career central banker, and has held various important positions, including Chief Economic Advisor - Monetary Policy (CEA-MP). Needless to add, the primary function of the SBP Governor is to take appropriate measures with a direct bearing on domestic inflation as well as on the exchange rate that may be overvalued with the objective of understating the government's rising external indebtedness, as is the case in Pakistan, which in turn is negatively impacting on the country's exports. Unfortunately, the Finance Minister's response to this 'transgression' by Riazuddin was typical: a commitment that the name of the full time Governor will be announced upon the Prime Minister's return on 6th July (yesterday). One can only hope that ranking officials in the central bank as well as ranking bureaucrats working within the Ministry of Finance develop a sense of responsibility to the taxpayers instead of to the cabinet member who plays a role in their appointment/elevation.
Last but not least, many analysts have plausibly argued that historically the PKR had been devalued by about 5 percent per year and Wednesday's 'devaluation' of 3.1 percent was overdue. Be that as it may, both fiscal and monetary authorities are required to work in tandem without overstepping their boundaries. If there is any disagreement between them, it needs to be hammered out at the forum of Fiscal and Monetary Co-ordination Board rather than at a crowded press conference.