KARACHI, May 9: The State Bank of Pakistan has warned that it may impose severe administrative control over foreign exchange market ‘if the market fails to discipline itself’.

The warning was issued in a meeting between SBP Governor Dr Shamshad Akhtar and heads of commercial banks on Friday. “The central bank is in no mood to apply direct administrative control over the foreign exchange. However, if the market fails to discipline itself, the regulator will move to fix the situation,” she asserted.

The fast depreciation of rupee against the US dollar developed into a serious national problem and desperation was visible as the authorities started blaming each other for this situation.

The SBP also held a meeting with the exchange companies to save the weakening exchange rate system.

The meeting was assured by the SBP that foreign exchange inflows to the tune of $3 billion to $3.5 billion are expected to come in the banking system in the short to medium-term.

She expressed concern over excessive volatility and weakened exchange rate and commented that the recent behaviour of the exchange market “is totally out of line.”

“We aren’t in a crisis-like situation … several measures are in place to remove macro-economic imbalances,” she said, and added that the government has expressed its firm resolve to bring down fiscal-deficit, retire central bank borrowings and cut non-developmental expenditures.

Dr Akhtar informed the meeting that the government has taken steps to mobilise foreign funds and added that some of the inflows which are expected to realise soon include $2.1 billion from multilateral banks, $500 million from friendly countries, $200million for earthquake relief, $100million from DFID, $700million from MCB Bank’s stake sale, $100 million from Barclays Bank and the rest through private sector GDRs and other regular sources.

“Current rupee volatility is not reflective of the macro-economic fundamentals,” she said, adding she was perplexed over recent inter-bank market behaviour and urged banks to play a proactive role to kill negative sentiments in the market.

She said the central bank had made timely and effective interventions in the market and added that any future interventions by the central bank would be in accordance with its analysis of the situation.

“Had we not intervened effectively, the exchange rate would have been at a different level, but present level doesn’t reflect fundamentals,” she added.

She said that the banks have a duty to encourage exporters not to hold back export receipts and mobilise foreign exchange funds in the interest of the country.

The SBP governor urged banks to increase their deposit rates and said banks should also focus on increasing private sector credit disbursements as it would help the country remain on a high GDP growth trajectory.

She said it had been noticed that some banks are engaged in excessive trading which is detrimental to market discipline.

“Customer’s excessive shopping with different banks for the same transaction often creates a perception of larger outflows, which is not always the case,” she added.

She said it was also noticed during surprise inspections that a few large cash transactions were going through the FE-25 accounts i.e. cash deposits followed by TT outflows. There is also a considerable delay in exporters selling their proceeds in the market.

“Banks are responsible to ensure compliance with all SBP regulations in this regard, otherwise they will face penalties,” warned the SBP governor, adding the SBP would also increase vigilance to ensure that the export proceeds are realised in time.