The State Bank of Pakistan weakened the rupee for the fifth time this year and raised the key interest rate.(AP)
The State Bank of Pakistan weakened the rupee for the fifth time this year and raised the key interest rate.(AP)

Pakistan plans to curb central bank’s power to manage currency

The State Bank of Pakistan raised its policy rate to 10 percent from 8.5 percent on Friday. The nation has raised rates by 4 percentage points this year, making it the most aggressive hiker in Asia.
By Faseeh Mangi | Bloomberg
PUBLISHED ON DEC 04, 2018 01:04 PM IST

Pakistan’s government plans to make the central bank report any planned currency adjustments to a committee, a move seen to curb the regulator’s independence as the nation negotiates an International Monetary Fund bailout.

On Friday, the State Bank of Pakistan weakened the rupee for the fifth time this year and raised the key interest rate -- moves that roiled the stock market. Prime Minister Imran Khan told reporters on Monday that he found out about the devaluation through press reports and that the planned committee will help the central bank smooth currency volatility.

This “would clearly mean curtailing the powers of the central bank in independent decision-making,” said Amreen Soorani, the deputy head of research at JS Global Capital Ltd. in Karachi. “It will be a clear negative for the economy and it might create a bottleneck in the IMF negotiations.”

In power since July elections, Khan’s administration is scrambling for funding after inheriting a depleted treasury. Yet discussions with the IMF to help plug a gap of at least $12 billion stalled last month after disagreements with the fund over a raft of policy measures. In the meanwhile, foreign-exchange reserves have dwindled to a four-and-a-half year low and the current-account deficit continues to widen.

Independence Countermanded

While independent in law, the central bank has struggled in recent years to assert its authority and several currency devaluations have been countermanded by the finance ministry in Islamabad. That’s despite Finance Minister Asad Umar telling Bloomberg this year that the State Bank would be allowed to control monetary policy without government interference.

The government will be looking into “contours and scope” of how the central bank manages the currency as the existing way is not working well and needs a review, Noor Ahmed, the secretary at the economic affairs division, said by phone from Islamabad. The central bank should intervene in the currency in case of an abnormal fluctuation, he said. Abid Qamar, the State Bank’s spokesman, declined to comment.

Such moves are likely to be frowned upon by the IMF, said Saad Hashemy, chief economist at Topline Securities Ltd. in Karachi. “The ideal approach would be to leave the exchange rate to market forces and also strengthen the capacity and independence of the regulator.”

Pakistan is not alone in witnessing friction between its monetary policy makers and the government. U.S. President Donald Trump has repeatedly criticized the Federal Reserve for raising interest rates, while in India the government wants a larger share of the central bank’s capital.

The State Bank of Pakistan raised its policy rate to 10 percent from 8.5 percent on Friday. The nation has raised rates by 4 percentage points this year, making it the most aggressive hiker in Asia.

The government should not dictate what the central bank should be doing, said Amjad Waheed, chief executive officer at NBP Fund Management Ltd. in Karachi.

“The government interfering in the currency has resulted in a disaster for the economy in the past,” Waheed said.

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