THE recent flip-flop by the State Bank on an important decision impacting the quantity of dollars available for sale in the open market shows that our management of the exchange rate has become a game of hide-and-seek. What exactly happened is a little technical, but important to understand. Money changers regularly collect large amounts of foreign currency in cash from a range of countries, and send it to Dubai where it is converted into dollars and brought back to Pakistan, either as cash again or remitted through the banking system. On Jan 1, the State Bank imposed a new regulatory measure mandating that only 35pc of the cash sent abroad could be returned in cash form; the rest would have to come through the banking channel. Perhaps the move was intended to increase the availability of dollars in the interbank market. In any case, from that day onward, the open market, where dollars are purchased in cash, experienced shortages and the rate began to climb, hitting a peak of Rs113 on Monday. Following an emergency meeting with exchange company representatives on Tuesday morning, the State Bank hurriedly reversed the ceiling and the rate began to stabilise again.

On its own, this would not be a significant story, but coming as it does in the midst of widespread anticipation of an overvalued exchange rate and dwindling reserves, it gains in significance. The most obvious question to ask is why the State Bank imposed the measure in the first place if it was going to lead to dollar shortages in the open market that would necessitate a quick withdrawal. Was there a lack of foresight, or an inability to manage the consequences, or both? Next question to ask is why the move was necessary. What alternative does the State Bank have in mind, considering that whatever purpose the decision was supposed to serve now stands nullified in the wake of the withdrawal? Ideally, the rupee is supposed to find its own value in the market.

But the restraints that have been artificially applied to this process during the years when Ishaq Dar ruled the markets as finance minister made it impossible to discover the true value of the rupee against the dollar. In the meantime, reserves were built up on the back of rampant foreign borrowing while the exchange rate was kept artificially stable. The situation became increasingly untenable as demand for the dollar outstripped its supply for a prolonged period of time, forcing banks to resort to short-term foreign borrowing to shore up supplies. Today, that trajectory has brought us to a cul-de-sac, and finding a way forward has turned into a game of hide-and-seek in which the real value of the rupee lies at the end of a thorny path of tough decisions that nobody is willing to own.