Pakistan Rupee devalues by 3.5% in a single day leading to war of words…

In its recent State of economy report released on 30 June 2017, State Bank of Pakistan reported that its current account deficit was highest since Q2 2009.

Pakistan’s overall external balance recorded a deficit of US$ 1.6 billion in Jul-Mar FY17, against a surplus of US$ 1.1 billion in the same period last year. This was mainly caused by a large trade deficit on the back of high imports– without a matching performance by exports. The imports of fuel, machinery and food items (mainly palm oil and pulses), all increased sharply due to robust domestic demand and ongoing power and infrastructure development activity. This dynamic pushed the current account deficit (CAD) to US$ 2.6 billion in Q3 – the highest since Q2-FY09. The higher CAD was recorded despite the receipt of US$ 550 million inflow under Coalition Support Fund in the third quarter. For Jul-Mar FY17, the current account gap amounted to US$ 6.1 billion, over twice the level recorded in the same period last year.

Just a few months ago, on 2 May 2017 the government appointed an interim chief of the central bank for 3 months till a new appointment:

It is informed that the Federal Government vide its Notification No. 3(4)-Bkg-I/2013 dated 1st May, 2017 has appointed Mr. Riaz Riazuddin, presently serving as Deputy Governor State Bank of Pakistan, as Acting Governor State Bank of Pakistan with immediate effect, for a period not exceeding three months or till appointment of a regular Governor, State Bank of Pakistan whichever is earlier, in terms of sub-section (3A) of Section 10 of the State Bank of Pakistan Act, 1956.
Thus, a new Governor was to be appointed by Aug 2.
However. on July 5 2017, the currency depreciated by 3.1% in a single day. SBP termed it as adjustment against the high CAD:

Today, the PKR-US$ exchange rate in the interbank market has depreciated by 3.1 percent from Rs 104.90 per US$ yesterday to Rs 108.25 per US$.
While almost all macroeconomic indicators have been showing encouraging picture, such as decade high real GDP growth, increase in investment, credit expansion to private sector, and subdued inflation; the deficit in the external account has been rising for some time. Accordingly, the exchange rate adjusted in the market and 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.
SBP also believes that the current exchange rate is broadly aligned with the economic fundamentals. SBP will continue to closely monitor the developments in the foreign exchange markets and stands ready to ensure stability in the financial markets.
This sudden drop was bound to irritate the Finance Minister who is accusing the interim Governor:

While rectifying his earlier statement that he gave on Wednesday when he claimed that current political instability could be behind rupee deprecation, Dar said it was actually the result of an individual act. “On Wednesday morning, an individual called the banks and asked them to depreciate the rupee against the US dollar, which was tantamount to damaging the economy,” said Dar, adding that even the SBP deputy governor was not aware of the decision by Riaz Riazuddin.

Dar also announced that a competent person with integrity will be appointed to head the inquiry to be launched to find out the reasons to devalue the rupee. He said that all the interbank transactions would be investigated to find out who got benefited from the rupee devaluation. Dar also rejected the notion that external account position required rupee depreciation. The minister said that current account financing was the responsibility of the finance ministry that it was fulfilling.

Dar said 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 in a day or two after PM Sharif returns,” he said.

Dar thanked the bankers who, he said, accepted the federal government’s position on the value of the currency. He claimed that during the meeting the bankers expressed repentance over Wednesday’s incident.

It was for the first time that the federal government publicly accused a sitting governor of ‘playing games’ with economy.

It is yet to be seen whether Riaz Riazuddin would prefer to continue as deputy governor after appointment of a new governor in light of Finance Minister Ishaq Dar’s mistrust on him. The SBP Chief Spokesman Abid Qamar did not respond to a question whether Riaz Riazuddin would continue after the distrust showed by the finance minister.

Hmm..interesting times for central bankers worldwide..


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