ISLAMABAD: The government on Sunday formally ordered investigations into last week’s sharp devaluation of the rupee and sought a report within 10 days.

The ministry of finance announced that it had “officially asked the Governor State Bank of Pakistan (SBP) to initiate an inquiry” into the depreciation of the rupee against the US dollar exchange rate in the interbank market on July 5, 2017.

Tariq Bajwa, a former civil servant from the district administration group, who was suddenly posted as governor of the central bank after the sharp fall in the rupee value, was also directed to “send a report in this regard within a period of ten days”, the announcement said.

The ministry said the inquiry had been “recommended” by Finance Minister Ishaq Dar in his capacity as chairman of the Monetary and Fiscal Policies Coordination Board which comprises the representatives of the ministry of finance and the central bank.

Finance ministry asks SBP governor to submit report in 10 days

After a meeting with the presidents and CEOs of different banks on July 6 on the issue, the finance minister had decided that a detailed inquiry would be held into the matter, and those responsible would be held to account.

The rupee-dollar exchange rate in the inter-bank market had deteriorated by 3.1 per cent from Rs104.90 per dollar on July 4, to Rs108.25 on July 5.

The sudden depreciation led to speculation and anxiety in the foreign exchange market. On the same day, i.e. July 5, the finance minister took immediate notice and action in the matter.

He called for a detailed report from the SBP on the `artificial and unnatural’ deterioration in the exchange rate and called an emergency meeting with presidents and CEOs of banks on the next day, July 6.

As a result, the exchange rate in the interbank market improved in favour of the rupee. The finance minister had claimed that his reaction had resulted in stabilisation of the rupee-dollar exchange rate in the interbank market to Rs105.50 soon after the financial markets opened on July 6 before he had a meeting with the heads of banks.

The ministry said that under the State Bank of Pakistan Act, 1956, the Monetary and Fiscal Policies Coordination Board, comprising the federal minister for finance (chairman) and other members, including the SBP governor and the finance secretary, is responsible for coordinating the exchange rate policy as well as the fiscal and monetary policies, to ensure consistency among macroeconomic targets.

However, the sharp deterioration of the exchange rate of July 5 occurred due to the fact that members of the Monetary and Fiscal Policies Coordination Board, including the finance minister and finance secretary, were not taken on board on the matter, the ministry said.

The finance minister had severely criticised the sharp depreciation in the value of rupee and described it ‘artificial and unfortunate’, far from economic fundamentals and caused by ‘miscommunication’ between an individual and the central bank.

Without directly naming, Mr Dar had put the blame on acting governor of the SBP and said this had caused a colossal loss of Rs230 billion in the shape of increased public debt due to devaluation of the rupee against the dollar.

“Action would be taken in the light of the inquiry report,” the minister had announced last week.

Mr Dar then moved swiftly to appoint Mr Tariq Bajwa – his close aide as former secretary finance, secretary economic affairs division and chairman of the Federal Board of Revenue – by the night even though he said the government had the option to continue with the incumbent acting governor till July 28-29.

Published in Dawn, July 10th, 2017