ISLAMABAD: Deputy Governor State Bank of Pakistan Riaz Riazuddin said on Wednesday that he had decided on his own to depreciate Pakistan rupee by 3.1 per cent against the US dollar on July 5 to correct imbalances in the external sector.
He also defended his authority to take decisions independently without consulting the Finance Ministry.
“The decision to depreciate rupee against the US dollar was correct and I took this decision in consultation with my team as the acting Governor of SBP,” Riaz Riazuddin told members of the Senate’s Standing Committee on Finance.
He is said to have told parliamentarians that growing foreign debt repayments and external sector deficits were main reasons behind the decision to depreciate the rupee.
Pakistan’s current account deficit swelled to $12.1 billion in the previous fiscal year against the Finance Ministry’s faulty projection of just $4.5 billion.
Similarly, the trade deficit gap widened to $32.5 billion against projected $20 billion. The situation is expected to worsen during this fiscal year as well.
“Revealing reasons for depreciating the rupee publicly could impact market sentiments since conditions that led to the depreciation have not changed much in the past three to four weeks”, said Tariq Bajwa while requesting the Chairman of the committee to send media persons out of the room.
On the request of the Governor SBP Tariq Bajwa, the Senate’s Standing Committee on Finance held the meeting in-camera.
On July 5, the rupee fell to 108.25 against the greenback in interbank trading that raised alarm bells in the finance ministry.
Former Finance Minister Ishaq Dar ordered an inquiry into the affair.
In response to the crisis, the former Finance Minister decided to immediately appoint the new Governor and sent Tariq Bajwa to take control of the SBP.
“The inquiry to determine reasons behind the rupee deprecation is almost complete,” said Tariq Bajwa after the meeting.
Riazuddin informed the committee that foreign debt repayments and external sector imbalances were the main reasons behind the rupee depreciation, a member of the standing committee said after the meeting.
At one point, the Deputy Governor told the committee that there was not even a single macroeconomic indicator that suggested that the rupee value was correct.
In its July 5 hand-out, the SBP also cited similar reasons while saying that the “depreciation in exchange rate will address emerging imbalances in the external account”.
“The deficit in the external account has been rising for some time and accordingly, the exchange rate adjusted in the market,” stated the central bank in an official hand-out.
“I do not smell any wrongdoing and Riaz Riazuddin took the right decision,” said Senator Saleem Mandviwalla, the chairman of the standing committee after the briefing.
Senator Saud Majid questioned the rationale given by the deputy governor for depreciating the rupee against the US dollar.
“It was a wrong decision on part of the deputy governor to depreciate the rupee, which was subsequently corrected by the federal government and market forces,” said Senator Saud Majid after the in-camera meeting.
When he was questioned if Rs105.39 was the real value of rupee given huge external financing requirements of $19.7 billion in this fiscal year, Senator Majid said that he did not know about the future trends but the rupee should not have been depreciated.
Riaz Riazuddin also defended his authority as the acting governor SBP to decide about the rupee value. He told the committee that the SBP Act of 1956 fully empowered the central bank to take decisions without consulting the federal government.
However, the Governor SBP, Tariq Bajwa, is said to have told the committee that Section 9B of the SBP Act gives a say to the federal government in the SBP decision-making process.
Section 9B is about the Monetary and Fiscal Policies Coordination Board, and it only talks about monetary, fiscal and exchange rate policies coordination. It does not give any authority to the federal government to intervene in the day-to-day decision-making of the central bank.
Riaz Riazuddin is said to have told the standing committee that he was not bothered who was the beneficiary of the rupee depreciation. He informed the committee that he took the decision in light of the external sector deterioration that had required immediate action.
Senator Mandviwalla said that as long as the federal government managed the exchange rate, it was very difficult to predict the real value of the rupee.