ISLAMABAD - A day after rupee value sharply depreciated against dollar, creating a crisis in the financial markets, Finance Minister Ishaq Dar denounced it as an “artificial” move and promised an inquiry after the appointment of a permanent central bank governor immediately.

The sudden increase in dollar value was caused by a “communication gap” within and without the State Bank of Pakistan (SBP), the minister told the media after chairing an emergency meeting of the presidents of domestic banks and financial institutions.

The rupee had plunged 3.1 percent in the opening hours of interbank trade on Wednesday, the largest single drop in the rupee’s value in nine years.

It sparked a shortage of dollar in the open market as dealers preferred to hold the foreign currency rather than sell it.

Dollar value was Rs104.9 on Tuesday and it rose to Rs108.50 on Wednesday noon, before settling at Rs108.25 by close day. However, the value came down to Rs105.5 on Thursday.

The rupee had been stable for nearly two years, and the unexpected tumble on Wednesday caught top government officials, including Dar, off guard.

Analysts said the State Bank had effectively devalued the rupee by not intervening to prop it up as it usually does.

Traders say the SBP controls the thinly traded rupee market that works as a managed float, while the bank on Wednesday evening backed a weaker rupee, saying it would ease balance of payments pressures in the $300 billion economy.

Supporting the rupee depreciation, the central bank said in a statement on Wednesday, “SBP also believes that the current exchange rate is broadly aligned with the economic fundamentals.”

It added that depreciation in the exchange rate would address the emerging imbalance in the external account and strengthen the growth prospects of the country.

But Ishaq Dar said the sharp drop in the rupee was harmful to national interests and criticised the central bank, saying it was not its job to worry about the current account deficit.

“The current account deficit is the work of the finance ministry and to alter it, the State Bank is not supposed to do that,” an annoyed Dar told media.

Calling the dollar surge ‘surprising’ and ‘artificial’, he also withdrew his initial comments wherein he had blamed the uncertain political situation in the country for the dollar value hike.

He said that no person, including him, has any authority to artificially adjust the dollar value. “The market will adjust and stabilise on its own,” he said, adding that he has faith in the open market.

Sources informed The Nation that finance ministry has held the SBP acting governor Riaz Riazuddin responsible for the sudden spike in dollar value. However, the detail inquiry would determine the responsible person in next 10 days.

Riaz has been holding the charge of acting governor after Ashraf Mahmood Wathra retired as governor on April 29 this year upon completion of his three year term.

Dar said that government will appoint a permanent SBP governor on Thursday (same day) or Friday (today), after Prime Minister Nawaz Sharif returns from his two-day visit to Tajikistan.

“A transparent investigation into the matter would be conducted after appointing new governor. We will gather all the facts, including who profited and who bore losses from this hike,” the minister vowed.

The finance minister said foreign exchange reserves currently stand at $21 billion. Of these, $16 billion are with the central bank and the remaining five billion with the private banks.

Dar said that Pakistan’s foreign loan and liabilities would have been enhanced by Rs230 billion if the dollar value remained at Rs108. The rupee depreciation also increases inflation rate, besides soaring the public debt payment.

Boon or bane?

However, most of the analysts said that SBP took right decision by depreciating rupee value, and emphasised that that government should not intervene in the market situation.

“This is something that should have been done much earlier,” said eminent economist Dr Ashfaque Hassan Khan.

All the economists and International Monetary Fund were asking for rupee depreciation to boost exports, he said, adding that government was putting extra pressure on the exporters.

“The rupee depreciation will help in boosting the country’s exports, which [in turn] will [help] control the soaring current account deficit,” said another economist wishing not to be named. “Pakistani exporters have long complained that the rupee is overvalued, and thus hurting their competitiveness,” he added.

The International Monetary Fund (IMF) had previously said the currency was about 20 percent over-valued but Dar had rejected that, saying in May the figure was no more than 5 percent.

One analyst said such strong pressure on the State Bank by Dar called into question the independence of the central bank, which is among the most respected Pakistani institutions.

“It doesn’t send a good signal,” said the Karachi-based analyst who declined to be identified. “Dar is a dominant personality.”

But the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) on Thursday voiced concern over the sudden erosion in the exchange rate, terming it against the national interests and unacceptable.

The local currency has nosedived after remaining stable for three and a half years and now a dollar is being sold close to Rs109.50 in the open market which has created uncertainty, it said.

The government should immediately take steps to stabilise the exchange rate and take action against the elements who are trying to exploit the current political volatility, said Atif Ikram Sheikh, chairman of FPCCI Regional Committee on Industries.

In a statement issued here, he said that fall of the rupee will not improve exports and it will not help authorities tackle record trade deficit.

He said that export policy should be adjusted to improve export competitiveness leaving exchange rate unchanged, as the sudden change in rate damages masses by making imports costly and stoking inflation.

Sheikh said the uncertainty has hit importers and masses while many currency dealers were exploiting the situation, which calls for intervention by authorities.

Masses should not be made to pay the price for wrong economic decisions and failure of the export sector, he asserted.

“Our export sector has lost competitiveness due to lack of support and it is addicted to subsidies, tax breaks, bailouts, and currency devaluation,” he observed.

He said the situation will lead the government to borrow more to stabilise forex reserves which will be ‘economic suicide’.