Exchange rate fiasco and after

Developing countries cannot afford to have a free-floating, market-based exchange rate hardly merits any debate

The November 30^th exchange rate fiasco that saw the dollar soar into the highs never ventured in Pakistan earlier brought to fore the debate on what a proper exchange rate adjustment mechanism should be. Should it be the central bank calling the shots on its own or the government exercising rigid controls or something else, like a mix of the two? The issue came under discussion at a recent meeting of the Monetary and Fiscal Policies Coordination Board presided over by Finance Minister Asad Umar. At the meeting, the SBP is said to have proposed to the government that flexible exchange rate mechanism should be adopted from January 2019 onwards. The central bank’s proposal lies somewhere between a managed exchange rate regime, like the current one, and a free-floating mechanism, like the one that the IMF demands as a condition for Islamabad to avail its bailout package.

That developing countries like Pakistan cannot afford to have a free-floating, market-based exchange rate hardly merits any debate. There is no dearth of experts in the country, and outside, who insist on the viability of the use of the exchange rate adjustment tool by the central bank for long-term export performance, in particular. On paper, the SBP enjoys complete autonomy, in line with the law, as to its core functions like formulating and conducting monetary and credit policy and maintenance of the external value of the currency, but the government’s defacto role in the context cannot be ruled out, in view of its macro-and micro-economic targets. Since ours is a developing country where growth takes precedence over stability as the political class is ever under pressure to create jobs, subsidise fundamental needs and provide social protection, a central bank acting on its own is quite understandably a matter of political concern.

So long as the financial strength of the country does not afford the central bank’s dejure authority, treading a middle course — as suggested by the SBP itself — should be the best way forward. The government and the SBP, meanwhile, go ahead with their talks to put a ‘proper’ mechanism in place. 

Published in The Express Tribune, December 9^th, 2018.

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