ISLAMABAD: Insisting that the rupee was currently undervalued, the State Bank of Pakistan (SBP) on Tuesday hinted at taking additional measures to curb demand in the market and inflation.

Testifying before the National Assembly’s Standing Committee on Finance and Revenue, SBP’s Deputy Governor Dr Inayat Hussain said the rupee exchange rate had depreciated by 10.3 per cent between July 1 and Nov 12. He warned that normally took ‘two to six months for the depreciation to transpire into inflation’ as terms of existing contracts expire.

He, however, explained that the severity of the impact of depreciation on inflation would also depend on the additional measures that the central bank or the government may take. “There are certain measures that the SBP can take and there are some actions that the government can also take to minimise the impact,” he said.

The meeting of the standing committee was presided over by PTI MNA Faizullah.

SBP governor invited for briefing on falling rupee, inflation

Dr Inayat said there was a possibility of additional measures to curb demand in case of further pressure on exchange rate but declined to talk about the level of undervaluation of the rupee. His testimony coincided with an announcement by the central bank to advance meeting of the Monetary Policy Committee (MPC) from Nov 26 to Nov 19 “in order to help reduce uncertainty about monetary settings prevailing in the markets.

There are indications that the MPC could increase policy rate by 75-100 basis points to curb market demand and also to meet one of the requirements of the International Monetary Fund (IMF).

The deputy government declined to be drawn into the debate if and how much policy rate could be increased on IMF’s requirement. Dr Inayat said the interest rate adjustment was the mandate of the MPC and policy rate movement could be one of the required measures. He said based on IMF’s outlook about growing current account deficit, the central bank had already taken steps like increase in cash margins and import curbs of non-essential items to control monetary growth.

Responding to a question, he said some may suggest that depreciation had not resulted in export growth as anticipated because other conditions of the export growth like ease of doing business and others may not have been in place along with exchange rate depreciation. He said the central bank’s objective is to ensure financial market remains functional and let the market forces to determine the exchange rate and only make intervention in case of unusual movement.

Dr Inayat said most of currency devaluation in Pakistan had not been voluntary. When foreign exchange reserves fall and imports increase, there was hardly any option left otherwise there could be situation like that of Lebanon half of which was currently in the dark because of its inability to ensure energy supplies.

“That means the worst is yet to come,” chipped in former minister for planning of the PML-N Ahsan Iqbal. He said the government’s key argument for massive devaluation over the last three years had been export growth and current account control but exports had not increased beyond 2018 level and instead imports had went up significantly.

He said the world bank and rating agencies had highlighted current account deficit in 2018 as interim challenge based on project development which required bridge financing for two years but the current government misunderstood the issue and applied emergency breaks by increasing the policy rate to 13.25pc and devaluation, the cost of which continued to be paid by the country even today.

While discussing devaluation, monetary policy and its inflationary impact, the committee members were of the view that theSBP governor should brief the committee in person. They expressed grave concerns over the devaluation of the rupee and conveyed their apprehensions with regard to the increase in inflation.

The members were of the opinion that the rupee devaluation will not provide any space to control the inflation. The committee decided that the SBP governor should come to the next meeting for briefing on exchange rate, inflation and ongoing negotiations with the IMF.

Published in Dawn, November 17th, 2021