Decline
Print Friendly, PDF & Email

On 5th June, Financial markets were rocked by a sudden decline in the value of the rupee against the dollar a day after which Finance Minister Ishaq Dar announced that a new governor of the State Bank of Pakistan (SBP) may be appointed after the return of Prime Minister Nawaz Sharif from his two-day visit to Tajikistan.

Dar made the announcement following a meeting the presidents of domestic banks and financial institutions, who were summoned to Islamabad on Thursday for an emergency meeting after the rupee was subjected to a sharp fall against the dollar a day earlier.

The rupee had plunged 3.1 percent in the opening hours of interbank trade on Wednesday, causing a shortage of foreign currency in the open market as dealers chose to hold rather than sell.

By midday, the dollar had risen to Rs108.50, before settling at Rs108.25 by close of trading. This was the largest single dive in the rupee’s value in nine years.

The minister’s theory regarding the events which led to the sharp fall in rupee’s value is that the political situation in the country had led to speculation in the market, triggering a depreciation in the value of the rupee.

Read More: 3.2% decline in the value of Rupees to dollar

“I made the decision to call this meeting yesterday after banking hours closed,” the minister said, revealing that the presidents of banks were summoned, along with the State Bank’s deputy governor of Banking and head of Treasury, Chairman of the Federal Board of Revenue and the finance secretary. According to Dar, the meeting continued for 2 hours.

“The market adjusted itself before the meeting began,” Dar claimed while addressing reporters, adding that a lack of communication was the reason behind the fall in the rupee.

The minister’s theory regarding the events which led to the sharp fall in rupee’s value is that the political situation in the country had led to speculation in the market, triggering a depreciation in the value of the rupee.

“It was mind-boggling when we saw that in a few hours [the rupee] had slid [so sharply],” he said.

“Unfortunately, a communication gap [has become apparent as] the reason behind the fall,” the minister claimed.

Insisting that the “market adjusts its own value — no one has the right to determine the value of the currency,” Dar said that a more detailed inquiry into the matter will be conducted.

Somewhat contrary to his claim that the dollar-rupee exchange rate would be determined by market forces, the finance minister also said it had been decided that the value of the dollar against the rupee would be maintained somewhere between Rs107 and Rs105.

He added that although the Constitution allows three months before a new governor of the State Bank has to be appointed, the process of doing so will be expedited.

“A new, permanent governor will be appointed today or tomorrow after PM Sharif returns,” Dar said.

Rumors suggest that the State Bank purposely let the rupee fall. This move may have been engineered to show how the political crisis which has stemmed from the JIT’s investigations

The SBP had held its silence as the slide of the rupee continued unabated the day earlier, creating serious concern amongst bankers as rumors swirled that the move might have been engineered to advance political goals.

Read More: The Pakistan diaspora,economy and the Gulf crisis

Rumors suggest that the State Bank purposely let the rupee fall. This move may have been engineered to show how the political crisis which has stemmed from the JIT’s investigations of the ruling family have adversely affected the market.

However, hours after the close of trade, the central bank issued a statement taking responsibility for the move, saying it had become necessary due to the growing external account deficit.

“The exchange rate adjusted in the market and the SBP is of the view that this depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country,” said the SBP, adding that it also believes “the current exchange rate is broadly aligned with the economic fundamentals.”

The move had provoked a sharp reaction from the finance ministry. A strongly worded statement called the decline “artificial” and said it had “negatively affected our foreign exchange markets”.

This was the first public conflict between the SBP and finance minister, who has been dominating the bank’s affairs for the last four years.

Comments & Discussion