By Muhammad Soban

ISLAMABAD, July 25: The State Bank of Pakistan (SBP) is chalking out an effective policy to ensure price stability and control the depreciation of the rupee, WealthPK reports.

Pakistan has been facing severe economic challenges that have put pressure on reserves, resultantly the value of the rupee is falling continuously against the dollar. The decreasing value of the Pakistani rupee has forced people to save their reserves in other currencies, especially the dollar, and in the form of gold.

Ali Chaudhary, the research adviser to the State Bank of Pakistan, said that the central bank was formulating a policy to ensure price stability so that the rupee could maintain its value. A Washington-based economist told WealthPK that the prime objective of the SBP was the stability of prices. “But there are some other issues that must be addressed by the central bank,” he added.

He said that prices had a direct relationship with the exchange rate. “The consumer basket contains around 50 to 60 percent of imported goods. When the exchange rate increases, it automatically increases the prices,” he added. The expert said that the SBP must focus on the other factors that affected the exchange rate. “The central banks of other countries, like the Reserve Bank of India, have announced to increase the supply of dollars to the market to ease the pressure on the exchange rate and maintain price stability in the country,” he added.

Dr Mahmood Khalid, a senior research economist at the Pakistan Institute of Development Economics, told WealthPK that the economy of Pakistan is pegged to the dollar. “The price of every item will adjust with depreciation. Our own currency does not act as a store of value and one has to look for other options such as securing properties, gold and even forex itself,” he added.

He said that many countries, which faced a balance of payments crisis, were prone to such financial asset holdings while the strong economies took steps to avoid such a crisis. “Russia is asking for payments in the rouble instead of the dollar to keep its currency strong,” he added.

Dr Mahmood said that even India has started seeking exchange in its own currency. “Pakistan also has made similar arrangements with Afghanistan. As long as Pakistan faces a balance of payment crisis, our currency will be under pressure and people will opt for other currencies,” he added.

About the SBP policy to restore the store function of the rupee, he said that the central bank must respond with all its policy handles to deal with the situation. “Besides monetary policy tools, they have also administrative and surveillance policy options. To me, the time has come for plugging the options of speculative buying from the markets through the money exchange dealers,” he added.

The expert suggested that currency-related business should be conducted under the supervision of banks. Banks are already managing a major part of such businesses through remittances and letters of credit. “Why do we need money changers in far-flung areas of Pakistan and major cities,” he questioned.

The business through banks will help to regulate the actual supply and demand of the dollar. With the end of over-the-counter transactions in the dollar, the speculative bubbles would burst and only genuine adjustments would take place. The government should also consider the option of trade payments other than the dollar. Foreign exchange retention by exporters is also a kind of subsidy, which needs to be withdrawn.

Credits: INP-WealthPk