State Bank of Pakistan (SBP) has so far purchased over $5 billion from the interbank market during the current fiscal year.
This has kept forex reserves stable at $8 billion and also contributed to keeping the Pakistani Rupee at Rs. 278/$, reported Express Tribune.
With this level of intervention, the central bank tried to prevent reserves from falling below $3 billion due to a lack of foreign loans. While the exact size of purchases is undisclosed, greenback buyouts exceed $5 billion and are still ongoing. Critics opine that this has led to an undervalued rupee and made inflation worse. They propose allowing the PKR to appreciate which could ease inflation and interest rates.
Authorities reportedly defend SBP’s actions as best to avoid a repeat of past reserve crises.
Notably, SBP’s dollar purchases have supported foreign exchange reserves but remain insufficient to cover imports for more than 1.4 months.
Also, the intervention is in direct contradiction with Pakistan’s market-based exchange rate system adopted in 2019. The current exchange rate overvalues the PKR and is unsustainable given the country’s trade deficit.
While authorities claim the Real Effective Exchange Rate (REER) indicates the rupee is not undervalued, experts disagree. Some experts are advocating for strengthening the rupee up to 20 percent to address economic challenges effectively.
India spent 100bn $ last year to do the same