The uneasy calm that prevailed in Pakistan’s forex market prior to the July 5 massive decline in the rupee’s value is still not over and a debate is raging about whether the local currency will fall again.

This debate became more intense as recently released data showed that the current account (C/A) deficit swelled to around $12.1 billion in FY17 from $4.867bn in FY16.

Most bank treasurers are almost sure the State Bank of Pakistan would not hesitate in letting the rupee fall again. For them, it is not a question of ‘why’ but just a question of ‘when’.

“Let’s see when the SBP lets the rupee find its real value,” says the treasurer of a local bank.

“The rupee has been put on life support in an oxygen tent after the sharp and swift reaction of the Ministry of Finance, but fundamentals of the external account are not lending any support to the local currency.

“I believe that the SBP will now allow a gradual depreciation of the rupee. It will not keep it where it is today,” he says.

Between July 6 and July 20, the rupee has regained much of the value it had lost to the dollar in the July 5 downward readjustment.

On July 20 it closed in the interbank market at Rs105.34 against the dollar, up from Rs108.24 on July 5 and slightly down from Rs104.90 on July 4, one day before it depreciated in one go.

Senior bankers say this swift recovery in the rupee’s value is not due to any substantial change in the supply of dollars in the interbank market, implying that the credit for it goes to the central bank’s intervention.

They, however, remain tight-lipped on whether the SBP intervened by selling dollars in the interbank market or by persuading banks to postpone or minimise their own dollar buying as much as they can.

Though the current account deficit is just too huge and should theoretically take its toll on the rupee’s health, the overall balance of payments (BOP) improved in FY17 giving policy makers a solid reason to argue that things are not that bad on the external sector.

In FY17, a surplus of $1.946bn was booked in the BOP against a deficit of $2.652bn in FY16. But this happened against the backdrop of heavy external borrowing of no less than $10.1bn, according to sources in the Ministry of Finance. About 37pc, or $3.7bn, of this amount came from China alone.

Senior bankers say the BOP surplus of FY17 cannot provide a justification for keeping the rupee artificially stable now, particularly when the C/A deficit has risen past $12bn and SBP forex reserves are falling.

Forex reserves held by the SBP fell to $15.478bn as on July 14 this year from $18.271bn at end-December 2016, a sharp decline of 15pc in just six and a half months.

The ballooning current account deficit and falling reserves of the central bank have a more direct impact on the dynamics of exchange rate than a BOP surplus and that, too, obtained through external borrowing.

By the time this write-up is published, the newly appointed SBP governor, Tariq Bajwa, would have announced his first monetary policy. “If the SBP goes for monetary tightening, it would get a cushion for keeping the rupee stable for a little longer,” according to a foreign bank executive.

“The rupee supply is high and it is overvalued.

Most treasurers are almost sure that the State Bank of Pakistan would not hesitate in letting the local currency fall again. For them, it is not a question of ‘why’ but ‘when’

If the SBP cannot let it find its real worth immediately due to government pressure, it might choose to say goodbye to a stable monetary policy stance and begin to increase the policy rate. That will make sense.”

Regardless of whether the SBP also considers a change in monetary policy stance, the new governor has announced his priorities and has sought banks’ cooperation in implementing them.

After spending more than a week with his colleagues at the SBP and after getting policy briefs by them, Mr Bajwa met heads of banks and told them he wanted progress on agricultural and SME lending; outreach of banking in least-served geographical locations, particularly Balochistan; Islamic banking; cyber security; and retail payment system.

He also informed banks that he wanted to streamline and improve the export/import of foreign currency notes, foreign currency transactions at the bank branch level, and restructuring and rescheduling of non-performing loans of the textile industry.

“Whereas all the above-listed items merit priority action, accelerating implementation on them and getting the desired results needs years, not months,” says another foreign banker.

“Financial markets at this stage are looking for a reliable, serious clue from the central bank on how it looks at the current exchange rates,” he says.

Meanwhile, the SBP has increased vigilance of exchange companies and required them to make online reporting of all transactions in detail so that the exact sources of forex inflows and outflows via these companies could be checked.

This measure has been taken to avoid any speculative attack on the rupee.

The central bank is also pushing both banks and forex companies to facilitate overseas Pakistanis in sending remittances back home through official channels.

Only a dramatic rise in exports and home remittances (two major sources of non-debt creating inflows of foreign exchange) can ward off the pressure on the rupee at least for the time being, senior bankers say.

But whether such a dramatic rise can come in the short run is a million-dollar question.

Published in Dawn, The Business and Finance Weekly, July 24th, 2017