The Central Bank defends the current exchange arrangement claiming that it has already made positive impact in extremely challenging economic circumstances at present facing worst balance of payments crisis in history
Following the excessive depreciation, inflation accelerated significantly through imported prices, while second-round effects of such excessive depreciation on other goods and services were also observed subsequently.
The implementation of this arrangement has brought in a greater stability in the exchange rate determination in both formal market and grey market thus far, while also minimizing excessive margins prevailed in both markets, and the effects of the same are expected to reflect in the exchange rates used for customer transactions.
According to the feedback received from the stakeholders, there exists broader consensus on the current arrangement of the exchange rate, which is market driven with less volatility and more predictability, compared to the earlier arrangement, which experienced excessively volatile of the exchange rate driven more by speculation rather than market forces and economic fundamentals
Moreover, due to the acute shortage of foreign exchange in the domestic foreign exchange market, along with continuous depreciation of exchange rate the conversions of foreign exchange by the foreign exchange holders delayed.
This was due to expectation of further depreciation and high premium offered in the grey market, thus adding further pressures on the currency,
Meanwhile, the demand for foreign exchange in the grey market thrived to part finance rising import demand outside the banking system, causing further pressures on the currency as well as heightening stresses in the banking system.
This significant volatility of the exchange rates drove up the interbank exchange rates as well as customer buying and selling rates in an abrupt nature, causing undue speculation on the currency.
Restrictions imposed on open accounts and consignment payments terms have helped curtail activity in the grey market, thereby narrowing the gap between the official exchange rate and the grey market rate.
Accordingly, the current exchange rate arrangement is viewed as a more credible mechanism, vis-a-vis an arrangement where grey market activity could operate freely.
Consequently, inflows on account of workers’ remittances to the banking system have gathered pace since the introduction of the new exchange rate arrangement.
This improved momentum in the domestic foreign exchange market is expected to consolidate with the progress being made towards reaching the staff level agreement with the International Monetary Fund (IMF) on a funding arrangement, along with the negotiations for bridging finance from other multilateral and bilateral partners.
The Central Bank reiterated that the current arrangement of exchange rate would be reviewed from time to time, and further flexibility would be allowed if need be, once market confidence is restored, supported by envisaged foreign exchange inflows to the country.