The State Bank of Pakistan (SBP) did not provide an indicative level to banks' treasuries within which the rupee dollar parity would be free to fluctuate for the second day on Thursday, leaving the commercial banks free to determine their own rates, highly placed sources told Business Recorder.
These instructions were issued the day after the newly appointed SBP Governor Reza Baqir was summoned to attend a meeting at the Prime Minister's Secretariat with foreign exchange dealers in which the Prime Minister threatened punitive action against the speculators. The foreign exchange dealers assured the Prime Minister that the issue was not one of supply but of market-related issues prompting the Prime Minister to set up a committee to resolve their problems.
Not providing an indicative level within which the rupee may fluctuate the very next day after the Governor SBP's meeting at the Prime Minister's Secretariat smacks of an attempt to embarrass the Prime Minister, Pakistan Tehrik-i-Insaaf (PTI) loyalists may maintain; however others contend Baqir may have been taken to task by International Monetary Fund (IMF) headquarters for the warning given to the foreign exchange dealers given that the staff level agreement stipulates a market-determined exchange rate. He may also have been given an ultimatum: allow the rupee to be determined by market forces or else face the possibility of a suspension of the staff level agreement.
Any suspension of the agreement with the Fund would compel the country to default on its foreign debt, 12 billion dollars is the shortfall next year as per Hafeez Sheikh, which would make additional foreign borrowing extremely difficult while choking investment, both domestic and foreign strangling employment opportunities, with its consequent impact on growth, and compromise the government's ability to spend on social sectors. Poverty levels would rise alarmingly accompanied by galloping inflation.
The staff level agreement with Hafeez Sheikh, Advisor to the Prime Minister on Finance and Baqir as the two senior-most Pakistani officials representing Pakistan during the negotiations with the IMF have yet to reveal any details of prior conditions however the IMF press release issued on 12 May does not specifically mention that a market determined exchange rate is a prior condition. But it does note that "a market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy."
As per IMF's 2014 study 82 countries and regions use a managed float or 43 percent of all countries. Thus several emerging countries find it ill advised to support a free float currency, especially countries like Pakistan where there a high liability of dollarization as well as financial fragility.
One would have hoped that the decision to abandon the managed float in favour of a free float had been taken within the country after an informed debate within the SBP and communicated to the government instead by two non-resident Pakistanis while negotiating with the IMF for a bail out package.
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