The rise back of the rupee, after a period of falling, represented the sort of administrative measures needed because the market was not functioning optimally. Basically, what really happened was that the dollar’s open-market rate was brought within the 4.5percent band that it is allowed to exceed the interbank rate. That band has been set by the IMF as one of the conditions in the current Stand-By Arrangement. While it does reflect the hope that the value of the currency to be determined by the market, it seems to have left out an important part of the mechanism, the regulator. It has given that role to the State Bank of Pakistan, but while it has devoted much effort to getting it independence from the government, it does not seem to have given it any teeth against the kind of collusion amongst currency exchange dealers to allow the sort of speculation that is indistinguishable from gambling, which currencies seem to attract when left to trade freely.
Apart from its indeed being a problem that approved channels of regulation cannot be relied on, the market-driven parity will come under pressure soon, as the balance of payments deteriorates. The problem with administrative measures, as the IMF seems to realize, is they are not based on some economic reality, and though they might work for the time being, they cannot withstand economic realities. Pakistan’s basic problem remains untouched: the country does not produce enough goods or services for the rest of the world, so as to pay for what it buys.
This latest deflation of the rupee also does not address the question of why there are two markets.One way of ending the difference between open and interbank rates would to ensure that there is a single market. Some currency dealers might face problems entering that market, and some banks might have teething problems, but it would help stabilize the rupee on a more solid footing that is afforded by the present arrangement. IMF attempts, presumably well meaning, to end market inefficiencies, seem only to have introduced different ones. It has to be realized that when a currency is allowed to trade without any regulation, the problems observed develop: insider trading and speculation amounting to gambling.
