KARACHI: The Rupee tumbled about 9.6 percent to a record low of 255.43 against the dollar on Thursday as the cash-strapped government eased its control over the currency to win much-needed loans from the International Monetary Fund (IMF).
The local currency lost 24.54 rupees versus the greenback in the interbank market, marking the biggest one-day loss, both in absolute and percentage terms ever recorded since the new exchange rate system was implemented in 1999.
The drop comes a day after foreign exchange companies removed a cap on the exchange rate, a key demand of the IMF as part of a bailout programme agreed in 2018.
The rupee fell to 262 to the dollar in the open market, a decline of 7.81 percent after losing 1.2 percent the day before, according to the rates provided by the Exchange Companies Association of Pakistan (ECAP).
“The much-awaited rupee adjustment has been done today by allowing banks to quote rates based on market demand-supply. This was the case till September 2022 but later the bank rate was kept in a narrow band that gave rise to the black market,” said Mohammed Sohail, the CEO of Topline Securities. “Now black market rate will come closer to the bank rate. This will help in increasing exports and inward remittances through the banking channel. This may also help in reviving the delayed 9th Review with the IMF and inflows from friendly nations,” Sohail added. In the near term, Sohail said, the depreciation would cause inflation, but it would also contribute to lowering imports. “Now do more to bring back the IMF immediately. Try to eliminate the current account deficit.”
A market-driven currency rate is one of the key requirements the multilateral lender has set for restarting the stalled bailout programme. Attempts by Finance Minister Ishaq Dar to defend the rupee since his appointment in September, including reported currency market interventions, had run counter to the IMF’s advice. Pakistan secured a $6 billion IMF bailout in 2019. It was topped up with another $1 billion last year to help the country following devastating floods, but the IMF then suspended disbursements in November due to the country’s failure to make more progress on fiscal consolidation.
“Pakistan is showing its willingness and finally conceding to IMF demands to secure funds after a long period of reluctance,” said Naveed Vakil, chief operating officer at AKD Securities Pvt Ltd. “The IMF is firmly positioned in Pakistan maintaining a market-based exchange rate and today [Thursday]’s move has given markets the confidence that officials will now complete the remaining required conditions to continue the IMF programme.”
A brokerage said the central bank had resisted calls to allow market forces to decide the exchange rate for months.
“The SBP’s reserves experienced a steep decline from $8 billion in September to $4.6 billion as of January 13, which increased the disparity between interbank and open market rates and resulted in a surge of black market rates because of a scarcity of supply,” said Topline Securities in a note.
Separately, the IMF on Thursday announced to hold much-awaited formal talks with Pakistani authorities from next week for the completion of the 9th Review and release of the $1 billion tranche.
“At the request of the authorities, an in-person Fund mission is scheduled to visit Islamabad January 31st–February 9th to continue the discussions under the ninth EFF (Extended Fund Facility) review,” the IMF’s Resident Chief Esther Perez Ruiz stated in a statement.
Amid the dwindling foreign exchange reserves held by the State Bank of Pakistan (SBP), it nosedived to $3.6 billion on January 20, 2023, after witnessing a decline in reserves by $923 million owing to external debt repayments.
The pending 9th Review had become due on November 3, 2022, and both sides continued informal virtual talks but it remained inconclusive.
Prime Minister Shehbaz Sharif chaired a high-level economic team meeting last week and decided to implement all tough conditions being imposed by the IMF. Then Pakistani authorities sent out a written request to the IMF for sending its mission for completion of the pending 9th Review. The IMF sought details of 10 to 12 sectors and asked for sharing additional data. The IMF placed its demand to demonstrate its political will for allowing free movement of the exchange rate by abandoning the artificial management of keeping the rupee stable.
Pakistan’s renowned economist Dr Hafiz A Pasha had predicted that with the implementation of the IMF conditions for the revival of the Fund programme, the general CPI-based inflation might go up to 35 percent on average against the existing rate of 25 percent on average in the first half of the current fiscal year. There is a need to ascertain who is responsible for dillydallying tactics and wasted two and a half months due to which the adjustment cost will be escalated.
When asked by a top official dealing with Pakistan’s economy, he stated that the cost of the revival of the IMF programme will have to be borne by the common people of Pakistan.
“The government will have to present a mini-budget to fetch over Rs200 billion additional taxes, hiking electricity and gas tariffs up to such an extent where there is no requirement of un-budgeted additional subsidies,” top official sources confirmed while talking to The News here on Thursday.
The IMF’s resident chief in her statement said that the Fund mission will focus on policies to restore domestic and external sustainability, including strengthening the fiscal position with durable and high-quality measures while supporting the vulnerable and those affected by the floods; restoring the viability of power sector and reverse the continued accumulation of circular debt; and re-establish the proper functioning of the FX market, allowing the exchange rate to clear the FX shortage.
“Stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that is vital for Pakistan’s sustainable development,” she added.
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