Editorial : Sign of a stable rate - Saturday 26th March 2011

Source : http://www.dawn.com/2011/03/26/sign-of-a-stable-rate.html

THE State Bank of Pakistan`s decision to lift restrictions on forward booking of imports is a positive development and will protect importers against adverse and unfavourable exchange rate movements. The move completes the rupee`s transition to a free-floating currency as required by the $11.3bn IMF balance-of-payment loan agreement. The facility, according to a notification issued by the central bank on Tuesday, will be available to the `genuine` importers immediately against their letters of credit for a minimum period of one month. The bank had `temporarily` suspended this facility to importers three years ago in order to restrict imports on the back of fast-depleting foreign exchange reserves and rising price inflation, which had caused the rupee to shed 28 per cent of its value in the latter half of 2008. The restoration of the forward cover for imports, thus, signifies stability of the exchange rate on the back of growing foreign exchange reserves and an improving current account.

The bank`s initiative, however, is expected to increase the demand for dollars in the inter-bank market and increase downward pressure on the currency. A slight increase in pressure on the exchange rate is desirable because it will make exports cheaper and imports dearer. Additionally, it will ease pressure on the interest rates and help the bank maintain its key policy rate at the current level of 14 per cent even if it decides against lowering it in its forthcoming monetary policy review. The rupee has shown resilience during the current financial year because of the growth in exports and remittances from overseas Pakistani workers. Even the uncertainty regarding the continuity of the IMF programme and the rapid increase in global oil prices have failed to adversely affect the exchange rate. Yet the political conditions in the Arab world and the volatility in the global oil markets demand that the bank remain cautious and alert to avoid a freefall of the rupee as was witnessed two and a half years ago. Hence, it is advisable for the banks to put in place strong checks to prevent the misuse of this facility.