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As Rupee Dives Finance Ministry asks SBP whats up(Inexplicable Drop)

Posted by on Tuesday, September 27, 2011, 12:40
This news item was posted in Business category and has 0 Comments so far .

Pakistan’s foreign exchange reserves are at record highs, the current account deficit is lower than its usual levels and exports are growing at a rapid clip. Yet the Pakistani rupee seems to be ignoring all of these relevant indicators as it continues its relentless plunge. So anomalous is this behaviour that the finance ministry has asked the central bank to investigate the matter.

Pakistani rupee
Pakistani rupee

In a letter written by the finance ministry to the State Bank of Pakistan, the government has asked its top financial regulator to find out if the rupee is being manipulated by the treasuries of the commercial banks in the country. The ministry fears a repeat of a similar scenario in 2004, when the treasuries of three banks were found to be manipulating the currency for their own gains.

Sources familiar with the contents of the letter told The Express Tribune that the central bank has been asked to take measures to curb the drop in the value of the rupee, which fell to an all-time low of Rs89.80 in trading on Karachi’s currency markets on Monday.

The rupee has lost about 5.8% of its value against the dollar since the beginning of the current fiscal year on July 1, according to Tahir Hameed, president of Islamabad Money Changers, about half of which has come in September alone.

“We do not see any reason for rupee depreciation, as the country has sufficient foreign exchange reserves to meet its all international obligations”, said Rana Assad Ameen, the acting finance secretary.

Ameen confirmed that the finance ministry has written a letter to the central bank to investigate the ‘real cause’ behind the rupee’s depreciation.

Finance ministry officials claim that, of the roughly Rs150 billion that had been added to the public debt stock in recent months, none was the result of a dollar-denominated transaction.

Nevertheless, the rupee’s depreciation does cause alarm in the finance ministry which has been struggling to curb both the deficit and the government’s debt. For every extra rupee that it costs to buy a dollar, the government’s dollar-denominated obligations increase in value by Rs55 billion.

Officials from the federal government and the central bank are expected to meet later this week to find a way to arrest the decline in the rupee’s value.

The State Bank’s official exchange rate, despite the precipitous decline on the open market, continues to be a far lower Rs87.62 against the US dollar.

Hameed, the Islamabad-based currency trader, said that many people had stopped selling dollars after the US threatened punitive action against Pakistan in the wake of the attack on the US embassy in Kabul. That shortage, said Hameed, was driving prices higher.

Independent economists, however, have also linked the devaluation with the government’s decision to abandon the International Monetary Fund (IMF) programme after failing to meet the Washington-based lenders conditions caused a suspension in the $11.3 billion bailout.

The government admits that a rupture in ties with the IMF will likely result in the continued blockage of loans from other international lenders.

Yet despite a weak macroeconomic outlook, economists are surprised by the speed and scale of the decline in the value of the rupee.

“Unscrupulous elements have been playing havoc with the exchange rate and they are exploiting the situation at a time when the central bank does not seem in a mood to take action,” said Dr Ashfaque Hasan Khan, a former finance ministry official and the dean of the NUST Business School in Islamabad.

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