The State Bank of Pakistan (SBP) has injected $1.2 billion into the inter-bank market in three months to defend the weakening rupee but could not stop the historic collapse of the national currency.
The $1.2 billion injections into the foreign exchange market are contrary to the underlined policies of the International Monetary Fund, Central Bank, and finance ministry as all the three giants claim that the value of the rupee is determined by market forces.
Government sources said that the central bank had injected $1.2 billion out of its reserves from mid-June to the first week of September.
The central bank reserves are accumulated by taking expensive foreign loans like the $1 billion Eurobond loan that Pakistan took at 5.9% to 8.5% interest rate in July this year.
The new injection seeks to maintain an artificial value of the rupee in the inter-bank market. With this fresh injection, a total sum of $5.8 has been thrown during Imran Khan’s government tenure.
Neither the Finance Ministry nor the central bank explicitly denied the SBP threw dollars in the market to stop the devaluation of the rupee.
“FX management is the sole responsibility of SBP and the Finance Division does not interfere,” responded the Ministry of Finance to a question whether the SBP pumped money with the approval of the ministry.
The SBP chief spokesperson Abid Qamar said, “Since June 2019, Pakistan has adopted a market-based flexible exchange rate system, where the exchange rate is determined by market demand and supply conditions. Under this system, the role of SBP’s interventions in the FX market is limited to prevent disorderly market conditions, while not suppressing an underlying trend,”
However, sources said that the $1.2 billion did not fall under the category of intervention “to prevent disorderly market conditions”. They said that the move was against the fundamental policy of market-determined exchange rate and the central bank would have to clarify this to the IMF during upcoming talks.
Qamar said that “when the exchange rate does not reflect realistic market conditions it can contribute to unsustainable current account deficits and repeated balance of payments problems”. SBP does not comment on speculations about market interventions, he added.
The chief spokesman neither denied nor confirmed that the central bank threw $1.2 billion in the market to defend the rupee.
But even the $1.2 billion injections could not stop a steep devaluation of the currency that eventually dipped to Rs168.94 to a dollar from Rs155.74 when the central bank started throwing money in the market.
Sources said that despite the fact that SBP had thrown $815 million in the exchange market since the start of the current fiscal year on July 1, 2021, the rupee had lost 7.28% or Rs11.51.
It is not for the first time that the central bank has pumped money into the inter-bank market to artificially defend the rupee.
The official record has shown that from July 2012 to July 2013, the central bank pumped $3.43 billion into the inter-bank market.