The mismanaged ‘managed floating rate’

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The mismanaged ‘managed floating rate’

January 9, 2019

Karachi, January 09, 2019 (PPI-OT): Saud Mehmood, Chairman, Taxation Sub-Committee of SITE Association of Industry in a press statement, has said that the Association completely understands that rupee depreciation is an important step to curtail the spiralling current account deficit. It is an unpopular decision for any democratic government because it leads to inflation which results in higher discount rate thereby curtailing demand. The government has shown maturity by taking a difficult decision to put the economy on the right track.

However, SAI does not agree with the method used by the government as large, arbitrary fluctuations in the dollar rate result in uncertainty which creates distortions in the market system. If we take last day’s examples where some unfortunate importers bought dollars at 144 whereas the closing rate was 139 resulting in unnecessary losses. Moreover, uncertainty about the next round of depreciation creates a conducive environment for speculation; that the rate could be 150, 170 or maybe even 200. Panic created by rumours harm the industry more than the depreciation itself.

Saud further added that we strongly suggest that the rupee depreciation should be handled the same way discount rate is set by SBP. Currently, SBP maintains a narrow band by controlling the supply and demand of dollars till it decides to redefine the band as it has practiced a few times this year. Instead of redefining the range on any arbitrary day, it should be done on a set date as is the case with monetary policy. This step would remove the uncertainty from the system enabling the businesses to plan accordingly.

Desired depreciation every month on a set date as long the current account numbers are not to the satisfaction of the policy makers is the best way to achieve the required exchange rate parity without creating panic. Gradually depreciating the Rupee per month will not encourage dollarization or any other sort of hoarding as the cost of such steps outweigh the benefits. “We strongly suggest a structured approach to handle rupee depreciation to minimize its impact on businesses” he remarked.

For more information, contact:
Secretary General,
S.I.T.E. Association of Industry
H-16, Textile Avenue, SITE, Karachi, Pakistan
Tel: +92-21-32562883, +92-21-32560705
Fax: +92-21-32560704

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