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KARACHI, Pakistan (Reuters): Pakistan’s new Central Bank Governor Reza Baqir on Monday dismissed the idea of a free floating rupee as he outlined reforms aimed at ending instability in the South Asian economy.
Baqir was last month appointed to lead the Central Bank in Pakistan, which has been hit by ballooning current and fiscal account deficits and repeated devaluations of the rupee.
Pakistan’s policy is a ‘market based exchange rate system’ that follows supply and demand, but that will not be left completely to the market, Baqir said in his first press conference as State Bank of Pakistan (SBP) Governor.
“So, if there is a volatility, then state bank intervenes. You need to keep a close eye on the market. That is our regime and we want to go with this regime,” Baqir added.
Pakistan’s currency has lost almost 50% of its value since December 2017, stoking inflation and putting pressure on the Government as voter anger at higher prices grows.
Last week Pakistan’s Finance Ministry signalled that worse is to come, with economic growth of 3.3% in the financial year ending June, well off the Government’s target of 6.2%, with growth seen falling to 2.4% in 2019/2020.
Pakistan agreed in principle to a $ 6 billion International Monetary Fund (IMF) bailout in April amid speculation that the fund wanted Pakistan to adopt a free float as part of any assistance package.
Baqir, an ex-senior IMF economist, said that the Government was enacting economic reforms aiming to shore up confidence.
This included ending the ‘strong rupee’ policy, which had led to pressures building up within the economy, but would not extend as far as a fully free floating currency.
“An exchange rate that remains fixed for a long time is not in our favour. On the other hand, a free float also is not suitable,” Baqir said in the coastal financial hub of Karachi.
Pakistan has always said the rupee is freely traded, but traders say the Central Bank underpins the exchange rate in a thinly traded market in what is a de facto managed float system.
The previous Government pursued a strong rupee policy, effectively fixing the rupee against the dollar at a rate that the IMF and analysts said was too high, leading the country to burn through its foreign currency reserves to defend the rupee.
Baqir said the Central Bank’s independence was vital and it will now follow market realities, adding that it will no longer give loans to the Government and cut money printing by the Central Bank that has stoked inflation.
“This is very big improvement for financial and monetary policy,” he said.
