The federal government has publicly debunked the State Bank of Pakistan (SBP) due to its failure to respond to the worsening currency crisis, directing its management to immediately take corrective measures.
In a statement that highlights the widening gulf between both pillars, the federal government crossed the delicate line between its authority and the operational independence of the central bank. The ministry of finance’s press note carried directions for the SBP and placed the entire responsibility of dollar-note shortage on it.
“Finance Minister Ishaq Dar has taken a serious note of the shortage at exchange companies and the scheduled banks,” read the handout. “He has issued orders to the State Bank to ensure that adequate supply of notes is made available in the market immediately.”
Under the SBP Act of 1956, the central bank enjoys complete operational independence, although the Ministry of Finance often calls the shots from the Q Block, but never publicly admitted its interference in the SBP affairs.
However, the administrative weaknesses of the SBP management, headed by its governor Yaseen Anwar, allowed the federal government to go public against the central bank for the first time in years.
Former SBP officials and independent analysts have interpreted it as a no-confidence against Anwar. However, Ministry of Finance sources said that the federal government has not yet decided to ask the governor to resign, though the issue came under consideration.
Meanwhile, the SBP did not respond to the question of whether the charges against the SBP were a no-confidence against the governor.
Last week, foreign exchange companies observed a token strike after scheduled banks refused to provide dollars. The situation was fully exploited by the speculators and the dollar’s exchange rate crossed Rs110, shedding value by Rs2 in one go.
With the devaluation of one rupee, an amount of Rs65 billion is added up in the country’s external debt even without any additional borrowing. Since the new government came into power, the rupee has shed its value by over 10% in the open market.
To defend the rupee, the SBP’s move to throw $3.3 billion in the market before the general elections ate a big chunk of reserves, a move that the economists had called naïve. Heavy international debt payments were also fast eating foreign currency reserves.
The Finance Ministry’s handout out stated that ‘the recent pressure on the exchange rate, particularly higher premium between inter-bank and open markets is primarily due to shortage of dollar notes for which timely arrangements of imports could not be made by relevant authorities’.
The International Monetary Fund has long advocated for the operational independence of the SBP and added conditions in the current and previous programmes. But the SBP’s lax management has weakened its case.
The finance ministry said that SBP authorities have that their will be no shortage of dollar notes in the interbank market, henceforth.
On Monday, in the inter-bank market, the dollar was traded at Rs108.5 a dollar while in the open market the rupee gained some value and remained at Rs109.80.
The SBP was approached for seeking reaction on the federal government’s move but no response was given till the filing of the story.
Published in The Express Tribune, December 3rd, 2013.