Managing Rupee's Parity.

Byline: Dr Kamal Monnoo

If a central bank is indeed independent, then what is the primary job cum responsibility of its Governor? Answer: To defend the national currency by ensuring that it is traded at its fair value, as everything else, like controlling inflation (through monetary policy), regulating financial institutions, etc. is secondary. So, again going by the assumption that the State Bank of Pakistan (SBP) is also indeed independent, perhaps it will only be fair to ask its Governor the following questions: Was the recent devaluation necessary and if yes, then (as per his vision) by how much? Is the downward revision in Rupee's value based on some fundamentals or is purely need or sentiment driven? If based on some fundamentals then what short-term and long-term measures is the SBP proposing to stem this parity slide and if based on the latter, then what measures does the SBP plans to adopt in order to mitigate this risk cum uncertainty, at least in the short-term? Never mind the answers, as not only one doubts that they will be forthcoming, but also because there is no visible institutional history of a transparent decision making mechanism for currency adjustments prevalent in the relevant quarters whim of the finance minister in the saddle generally rules the roost!

Still, what is of paramount importance for the government is to somehow give confidence to the people that there truly exists an exchange rate policy, which is not merely driven by market sentiment or borrowing compulsions. This confidence in the coming days would be necessary cum important for the government itself to manage the frequency and the size of the inevitable depreciations yet to come in the value of Pak Rupee. Exchange rate, as we know, is the key price that links an economy with the global market. This linkage becomes distorted or is even disconnected for two main reasons: If the price of our national currency is too high, then foreign economies find it expensive to do business with us and if the price is too low, then it becomes expensive for the domestic economy to do business with the rest of the world. In addition, an excessively undervalued currency not only retards investment, growth and employment generation, but can render domestic manufacturing uncompetitive over the long run, as prohibitive capital costs become a barrier to industrial balancing, modernisation, innovation and value addition. So it is crucial for the policymakers to get the price...