By Drazen Jorgic and Saad Sayeed
ISLAMABAD (Reuters) – Pakistan Finance Minister Ishaq Dar clashed with the central bank on Thursday over a 3.1 percent plunge in the value of the rupee the previous day, denouncing an “artificial” move and vowing a new bank governor would be appointed in days.
Pakistan’s rupee had been stable for nearly two years, and the unexpected tumble on Wednesday caught top government officials, including Dar, off guard.
Analysts said the State Bank of Pakistan (SBP) had effectively devalued the rupee by not intervening to prop it up as it usually does.
Traders say the SBP controls the thinly traded rupee market that works as a managed float, while the bank on Wednesday evening backed a weaker rupee, saying it would ease balance of payments pressures in the $300 billion economy.
But Dar said the sharp drop in the rupee was harmful to national interests and criticized the central bank, saying it was not its job to worry about the current account deficit.
“The current account deficit is the work of the finance ministry and to alter it, the State Bank is not supposed to do that,” an annoyed Dar told media.
The rupee regained some ground on Thursday, firming by 1.5 percent to trade at about 106.20/50 to the dollar in the late afternoon. A day earlier the rupee tumbled to as low as 108.5.
The central bank governor is appointed by the prime minister and is meant to be independent.
Deputy Governor Riaz Riazuddin was in May appointed as acting governor for three months until a permanent new chief was due to be named in late July.
But Dar said that decision would be brought forward in light of the currency volatility and a new permanent governor would be appointed late on Thursday or on Friday.
Dar also said he had ordered an inquiry into what he called a “communication gap” in the central bank, and between the bank and other intuitions.
“I don’t believe that any individual has this kind of authority to make such a big decision to make an artificial adjustment, and I am calling this artificial,” said Dar, who held an emergency meeting with heads of domestic banks and financial institutions on Thursday.
The International Monetary Fund (IMF) had previously said the currency was about 20 percent over-valued but Dar had rejected that, saying in May the figure was no more than 5 percent.
One analyst said such strong pressure on the State Bank by Dar called into question the independence of the central bank, which is among the most respected Pakistani institutions.
“It doesn’t send a good signal,” said the Karachi-based analyst who declined to be identified. “Dar is a dominant personality.”
Following a balance of payments crisis in 2013, improving security and vast infrastructure investment by China have spurred growth to above 5 percent for the first time in nearly a decade.
But over the past year the current account deficit has ballooned again, and the IMF last month said that eroding macroeconomic stability gains could pose risks to the economic outlook.
The SBP, in a statement late on Wednesday, said a weaker rupee would shore up growth and “address the emerging imbalance in the external account”, referring to growing balance of payment pressures.
Raza Jafri, executive director at brokerage Intermarket Securities, said he expected the rupee to consolidate in a range of 105-108 to the dollar.
“The central bank and the finance ministry will find middle ground,” Jafri said.
(Writing by Drazen Jorgic; Editing by Kay Johnson, Robert Birsel)