THE State Bank of Pakistan (SBP) surprised everyone with a forceful intervention in the interbank market on June 28. The intervention lifted the rupee up to 160.05 against the dollar from 164.05 on June 27.

What emboldened our central bank to make this move is not known. But it is being widely speculated that the SBP received a billion dollars from Qatar.

All central banks love to surprise. The SBP is no exception. For a central bank, using the element of surprise is crucial for disciplining erratic behaviour of financial markets — or even pre-empting such behaviour.

The rupee’s sudden grounding and dramatic recovery in the last week of the last fiscal year sheds some light on this aspect of foreign exchange management. What else it reveals is how the “patriotic prism” can become a handy tool for the SBP. SBP Governor Reza Baqir had met Prime Minister Imran Khan after the rupee’s plunge on June 26. Mr Khan reportedly shared with Mr Baqir his concerns about the rupee depreciation.

At a time when Pakistan is facing multiple internal and external challenges, managing its economy adroitly is an uphill task. As the economy keeps struggling with structural weaknesses, managing exchange rates has become all the more challenging.

The rupee lost 31.7pc of its value against the dollar in 2018-19 partly because it was already overvalued — and partly because foreign exchange inflows could not match outflows. Worse could have happened had China, Saudi Arabia and the United Arab Emirates not poured in upwards of $9 billion to help us avoid default on foreign debt servicing.

Had the IMF not insisted on letting the rupee slide, the SBP could have acted with less haste

Keeping the rupee stable in 2019-20 will still be difficult with rising external debts requiring us to spend even more foreign exchange for servicing these loans. That is where the IMF help is needed. On July 3, its board of directors will hopefully approve a $6bn loan for Pakistan. But to qualify for this loan, the country had to take some actions before the loan approval. These so-called prior actions also included depreciation to a certain extent before June and a substantial increase in the policy rate.

By bringing the rupee to 160 per dollar and the policy rate to 12.25pc, Pakistan has almost met two major prior actions. This is not to suggest that the rupee declined to this level and policy rate went up to this point without any economic rationale. But had the IMF not insisted on letting the rupee fall in line with foreign exchange market conditions and raising the policy rate aggressively, the SBP might have acted a bit unhurriedly.

What lends credence to this view is that the rupee’s decline accelerated in the last quarter of the last fiscal year — prior to negotiations for, and after the staff-level approval of, the $6bn loan on May 12.

Between April and June, the rupee lost 13.7pc value against the dollar in the interbank market. It closed at 160.05 at the end of June, down from 140.78 at the end of March. The quarterly fall would have been steeper had the central bank not defended the faltering rupee on the last working day of the fiscal year. On June 28, the SBP’s intervention lifted the rupee to 160.05 a dollar from 164.05 on June 27.

The rupee’s plunge to 162.17 on June 26 (from 156.98 on June 25) then its licking a new low of 164.05 on June 27 and finally its rise to 160.05 on June 28 need some explanation.

On the first two days, the SBP let the rupee fall as year-end foreign exchange outflows, including those on account of external debt servicing, were thick. By doing so, the SBP signalled that it would not hesitate to depreciate the rupee in line with the foreign exchange demand and supply situation. But by defending the local currency the very next day, it sent an equally strong signal: that Pakistan is in no mood for a free-float, as demanded by the IMF, and the SBP will intervene in the market as and when required.

The SBP chief had already made this clear in his maiden press conference on June 17. His actions proved he meant business. Whether he will be able to intervene in the foreign exchange market every time the central bank finds an economic rationale or disciplinary need to do so depends, among other things, on the level of reserves. On June 21, these reserves stood at $7.28bn, enough to cover slightly over one and a half months of the import bill. Against this, reserves held by commercial banks stood at $7.07bn, thus putting Pakistan’s total foreign exchange reserves at $14.35bn.

Unless the SBP’s foreign exchange reserves double in terms of the import bill coverage, it simply cannot intervene in the currency market effectively to rescue the rupee from dollar-demand battering. Of course, the central bank can make its future rupee-supporting mechanism more rewarding by a cleverer choice of timing or mode of intervention.

The SBP chief is consulting colleagues to hire some foreign exchange market veterans to advise the central bank in foreign exchange management, a former central banker told this writer.