WHEN sanity prevails, sanctity of economic fundamentals is ensured.

On July 5, 2017 sanity prevailed and the State Bank of Pakistan (SBP) set the rupee from an artificial trading band through a market-based mechanism.

But that sanity was lost in no time as the then finance minister, Ishaq Dar, audaciously compelled the central bank to reverse the move.

On Dec 8, sanity prevailed again when the central bank once again loosened the trading band of the rupee, forcing it to shed some value — and this time no one from the government objected to the move.

By the end of July, Nawaz Sharif had been disqualified as prime minister on the orders of the Supreme Court and replaced by Shahid Khaqan Abbasi. By end-September Ishaq Dar was convicted by an accountability court, and he was declared an absconder on Nov 21.

The sanctity of exchange rate has been ensured, at least for now.

This sort of fiddling with the economic indicators is unfortunate: it creates a bad image of the economy, creates confusion in markets and leaves everyone, including businesses and local and international investors, guessing about things that should be predictable.

In theory, Pakistan is practising a free exchange rate regime, but keeping in view the sensitive role that exchange rates play in an economy like ours, the central bank keeps the rupee in a certain rate-band to avoid volatility beyond control.

This is understandable. What is beyond comprehension is that fiscal authorities rather than the central bank want a final say in deciding when to loosen or tighten that trading band.

A modest 4.8 per cent depreciation of the rupee, between Dec 8 and Dec 12, 2017, still leaves the rupee overvalued, if its parity with the dollar is examined by the Real Effective Exchange Rate (REER) index.

But most bank treasurers and forex dealers believe that the central bank will not let the local currency fall any more — at least in the next two quarters, ie till June 2018.

After the slide of the rupee, inflation has spiked but it is difficult to predict whether a modest depreciation — and that too at a time when the economy is not suffering any supply side setbacks — can impact inflation numbers significantly.

It’s a separate story, though, that demand-pull inflation has already been in sight as the economy is growing fast. Coinciding this with a weaker rupee might keep general prices higher in 2018 than in 2017.

After the rupee’s depreciation, bankers are hoping for some tightening of the long-held easy monetary policy but central bankers say any decision in this regard is taken, and will continue to be taken, on the basis of overall assessment of the economic conditions in the country.

In simpler words, monetary policy tightening remains a distant possibility as the most pressing case for such a move — a worrying build-up in inflationary pressure — is nowhere in sight, productive sectors of the economy are doing reasonably well and SBP is vigilant enough to use central banking tools to keep broad money supply in line with the set targets.

Published in Dawn, The Business and Finance Weekly, January 1st, 2018