Dollar fall exposes soft underbelly of FX policy

Although Pakistan’s foreign exchange (FX) policy claims to be market driven, erratic moves by the government exposes its soft underbelly from time to time.

Data suggests that the rupee drops on average 5 per cent annually, but was kept artificially strong since August 2015.

Chief Executive Officer of Insight Securities, Zubair Hussain, believes that a strong rupee gave buying power to the general public. He added that given more purchasing power, the country experienced an increase in imports which led to further deterioration of balance of payments and put pressure on the rupee.

“The State Bank of Pakistan (SBP) used to inquire about import payments and it used to discourage dollar buying above Rs104.8 and for bulky payments it used to provide USD,” said an interbank market source.

He added that today, SBP’s tone changed and dealers were instructed to buy USD from the market, which caused the rupee to weaken as there was a rush to buy dollars from the open market.

SBP’s move today explains why Pakistan’s FC police is not market driven but is controlled.

In a recent meeting with SBP, banks suggested to let the rupee weaken 10 to 15 paisas on intraday trading, in order to ease pressure of rising balance of payments, added the interbank source.

“Everybody knew that if SBP removes its undeclared dollar buying cap the rupee would fall,” said the source.