KARACHI: The day did not begin like every other. Shortly after foreign currency markets opened at 9am, treasury heads in all banks received a call from the State Bank of Pakistan (SBP) saying “there is no level today”.

The words have now become a familiar code. In the six depreciations of the exchange rate before the latest one that jolted markets on Friday morning, this is the language with which the SBP signalled foreign currency traders that they were free to buy and sell the dollar at any rate they pleased. Within hours the rupee plunged by almost Rs10, the largest single day drop in the exchange rate in almost a decade.

The exchange rate is normally held at a predetermined level by the SBP through whispered intervention, usually by letting treasury heads of all banks know that they should not trade the dollar above a specified price. Once that instruction is withdrawn, like on Friday morning or on the six preceding occasions since July, the rupee always falls though never by as much as it did this time.

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“People aren’t used to dealing with markets in forex trading,” said a banker having detailed knowledge of how the day unfolded. “Once awareness builds up about how markets operate, such volatile episodes may well subside.”

At the close of trade, the exchange rate sat at Rs140 to a dollar for interbank trading as per the SBP, and the weighted average rate at which different banks were transacting dollars for their customers was at Rs140, after closing at Rs134 the day before.

The open market where retail transactions are undertaken was similarly hit. “No trading worth the name today took place today,” said Malik Bostan, president of Forex Association of Pakistan. “Normally we trade about $10 million per day, but today this figure was at $2m because buyers and sellers both practically vanished. Only those with an urgent need transacted today.”

He said the rate touched Rs144 at its peak, which arrived within an hour or so after the market opened, and closed at Rs138 by end of day. “How did the interbank rate rise and fall so much in a single day?” he asked, adding that the sharp fall seen later in the day indicated some kind of intervention, either by the government or the SBP.

Finance Minister Asad Umar called a press conference midday when the market was shut for prayer break, and tried to assuage concerns. “The State Bank is managing the exchange rate,” he said, and pointed out that in the past the rate was kept artificially overvalued which hurt the economy and created absurd distortions. He said the country’s exports were adversely affected by the artificial value, and went on to offer some glimmers of hope in a darkening economic scenario. He insisted that the external sector was recovering as exports and remittances showed an upward trend, and foreign investors’ interest had been revived, citing recent overtures from Suzuki, Coca Cola and Pepsi as examples.

He also announced a reduction of Rs2 in the prices of petrol and diesel. Explaining that global market prices had come down and the government was sharing the benefit with the people, he also pointed out how his government had halved the sales tax rate on diesel to control its price in the past when global prices were rising.

“When we came to power, the current account deficit was running at $2 billion per month. Today that has come down to $1bn instead,” the minister said. The current account deficit is the key indicator that measures whether an economy is accumulating or losing foreign exchange reserves.

Later in the evening once the curtain dropped on the day’s foreign currency trading, the SBP released its bimonthly monetary policy statement in which the bank announces any changes to the policy discount rate, the key rate that determines all other interest rates in the country, as well as providing a snapshot of the state of the economy. The bank surprised markets by announcing a 1.5pc increase in the discount rate bringing it to 10pc, larger than anyone had expected, and the largest increase since the cycle of monetary tightening began earlier this year. The discount rate was 5.75pc at the start of the year when monetary tightening began.

The news accompanying the announcement was not good. Where the finance minister only hours earlier tried to argue that pressures on the economy were easing, the SBP said: “The near term challenges to Pakistan’s economy continue to persist”. It cited the fiscal deficit (difference between state’s revenues and expenditures), rising inflation and low foreign exchange reserves as the key challenges.

Inflation has jumped and is now forecast to remain between 6.5pc and 7.5pc for the rest of the fiscal year, far higher than the target of 6pc and nearly double its level last year. “[E]conomic activity is expected to witness a notable moderation,” the SBP statement added, meaning the pace of growth would continue to decelerate till it comes in at “slightly above 4pc” by the end of the fiscal year. The target growth rate for the year was set at 6pc in the last budget, and since then different donor bodies have proffered estimates between 5pc and 6pc. This is the lowest forecast for the growth rate thus far.

On the external front, the statement noted a sharp deceleration in the pace of growth of imports as well as an increase in workers’ remittances and exports. Their combined effect “narrowed the external current account deficit from $5.1bn in Jul-Oct FY18 to $4.8bn in Jul-Oct FY19; a net improvement of 4.6pc”, though this was not enough to offset a continued decline in the foreign exchange reserves, that fell by $1.7bn from June 1 to Nov 23 this year.

It noted an increase in private sector lending, usually seen by economists as a sign of economic health but said this was mainly because of enhanced working capital requirement due to capacity additions undertaken by firms in the previous three years, and “substantial increases in input prices”.

The SBP said the trade deficit, which was at the heart of Pakistan’s external sector problems that are driving the country towards another IMF programme, would only be addressed if competitiveness of the export sector was addressed. Again the statement took a little shine off the finance minister’s attempt to present cheapening of fuel prices and release of sales tax refunds as his government’s proactive efforts to lift exports.

Published in Dawn, December 1st, 2018