KARACHI, Aug 7: In the past three months, the State Bank says it has sold $700 million in a bid to beat back speculative attack on the rupee's exchange rate. The market reckons that the sales to be somewhat higher. And the SBP governor Dr Ishrat Husain is firm that he would continue to sell dollars to keep the exchange rate stable.
The currency speculation has been fuelled by soaring trade deficits, rising inflation and interest rate hikes - something many bankers view as an outcome of high growth and normal business pattern.
Bankers are bullish on both domestic and global economic growth. Their sentiments have found support in the six monthly Monetary Policy Statement made in July on interest and exchange rate trends on the back of an economic growth momentum. If there were any lingering doubts, they were cleared by an address by Prof Dr Norbert Walter, chief economist Deutsche Bank Group at the Institute of Bankers "On the World Economic Boom- For How Long." He was invited as guest speaker by Dr Ishrat Husain.
Critics say that the Monetary Policy Statement should have been couched in ambiguous terms and differently worded so as not to give rise to speculation in currency markets. Yet seasoned bankers like country head of Citibank Zubyr Soomro feel strongly that the central bank owes to the market to depict true state of affairs. Any other course would delay adjustments and make things no better, if not worse.
Despite the many advantages of free float, it has one great potential danger. Volatility in foreign exchange markets can dry up foreign exchange reserves if not controlled effectively. Pakistan's current reserves of $12 billion gives the central bank the much needed confidence that it can beat back any speculative activity on the forex market.
In his observations Dr Norbert Walter warned that on certain occasions and in certain circumstances the foreign exchange reserves melt like snow under the sun. Yet his remarks, he said, were not directed towards Pakistan-where he saw stability in foreign exchange flows in the shape of remittances and other positive factors.
While opposing the Malaysian decision to have fixed paritywith the dollar he supported withdrawal of controls on current account transactions. Dr Walter, however, advised against capital account liberalization before the financial markets become mature as it can lead to mismatch of resources and can cause serious damage to the economy. The issue needs to be handled with care. It was not wise to liberalize the capital account till such time the markets become mature.
Yet another issue agitating the bankers is at what speed will the interest rates be adjusted. The Monetary Policy Statement says that "the CPI inflation is targeted at 5 per cent while interest rates are expected to rise gradually during fiscal 2005."
The interest rate would be adjusted on core inflation rate (excluding petroleum and food prices) and in response to interest rate hikes by the US and the UK but the central bank says it would, at the same time, ensure that these do not impact the growth momentum adversely.
Economists believe that normally the inflation rates are not as worrisome as long as the production capacities are not fully utilized. Both in case of the United States and Pakistan, productivity gains have been significant. But major traditional industries in Pakistan are working at 80-85 per cent capacity. US Fed Chairman Alan Greenspan does not see inflation as a major issue. The manufacturing sector in the United States is working at 78 per cent capacity.
Dr Norbert Walter, who does not mince words, however rejects Greenspan's views. In his candid remarks, he said Alan Greenspan should have stepped down in spring. He has waited too long to raise interest rates. He is behind the curve. He is too late. He also criticised the US Fed for not being transparent.
Interest rate adjustments take about 18 months to have their impact on the US economy. It takes longer in case of Europe, about two years. Anticipatory measures were needed to be taken by Greenspan, says Walter.
There may be some sort of stand-off between the State Bank and the financial market on the interest and exchange rates but leading bankers have great confidence in the management of monetary policies by Dr Ishrat Husain. They have made fabulous profits last year.