KARACHI: Even as Pakistan’s Prime Minister Imran Khan said he was caught unawares with the recent depreciation of the rupee, experts on Tuesday lamented the move by saying that the premier was sending out the wrong signals to the country’s top bank.
During a meeting with a few TV hosts on Monday, PM Khan said that he found out about the sudden drop in the value of the rupee against the dollar through media reports, adding that has now instructed the State Bank of Pakistan (SBP) not to take any decisions on the currency exchange rate without informing him first.
The premier’s statement stirred up a hornet’s nest in the country, with several questioning the lack of coordination between the SBP, the ministry of finance, and the ruling party.
On Friday, the Pakistan rupee (PKR) plunged to a historic low at PKR 144 before closing at 138.64, losing 3.4 percent, against the dollar. “Asserting that, in the future, the SBP will have to consult before taking decisions in areas such as the exchange rate or discount rate, the PM has given a wrong signal to an independent SBP,” Dr Ikram Ul Haq, a senior economist and an expert on taxation matters, told Arab News.
“This defeats the very purpose of autonomy of the reserve bank. With regards to the narrative of the market’s forces, the SBP or the government should not exercise any influence in maneuvering the exchange rate,” Dr Haq added.
Talking about the standard practice pertaining to such policy issues, the central bank is expected to inform the finance ministry prior to taking any decisions. “The central bank is a decision-making authority but it consults with the finance ministry first without taking decisions in isolation. We devalued the currency twice during our tenure and we had informed the-then Prime Minister Shahid Khaqan Abbasi,” Dr Miftah Ismail, former Finance Minister, told Arab News.
“It may be possible that you do not know about the exact timing of what’s happening but you know that it is going to happen,” he added.
Economists termed PM Khan’s decision to interfere in the affairs of the central bank as a move to compromise its autonomy which they believe is a result of miscommunication between the finance ministry and the PM’s office. “There is confusion within the government circles,” AB Shahid, a veteran banker, said.
“There is a difference between devaluation and depreciation. Devaluation is the deliberate act of the government and its concerned institutions, while depreciation depends on the market forces of demand and supply. In terms of devaluation, the decision is jointly taken by the central bank, finance ministry and the PM,” Shahid added.
“In the supply and demand scenario, the government, however, can protect its position in relation to an increase in the foreign debt burden and debt servicing. The government is also a stakeholder and it can legitimately interfere to safeguard its interests,” Dr Haq said.
The SBP is an institution whose independence is enshrined in the constitution of the country. “The central bank’s governor can exercise his powers to override other representatives of the country (including the prime minister and the finance minister). Its independence is clear-cut and spelled out,” Yaseen Anwer, former governor of the SBP, told Arab News.
“During my tenure as governor, it was very, very clear that I was very independent,” Answer, who served as the governor from 2011 to 2014, said, adding that the “State Bank Act states very clearly that the institution will be independent and autonomous. This status is supported in the Act which gives it independence.”
He added that: “My philosophy is never to use foreign exchange as a monetary policy instrument to manage the economy because it is very, very sensitive and dangerous.”
While he appeared noncommittal about the level of coordination between the central bank and the prime minister, Answer said that there was a regulatory body -- comprising the finance minister and the SBP’s governor -- which used to meet on a regular basis to discuss the issues.
Pakistan is negotiating with the International Monetary Fund (IMF) for a bailout program to support its external balance sheet. The second round of talks is expected to start in January next year.
Providing more autonomy to the central bank continues to be one of the conditions of the IMF. However, PM Khan’s instruction to the SBP may create issues for the team negotiating with the IMF during the delegation’s upcoming visit to the country.
