IMF range of 1.25pc between interbank, kerb rates of dollar breached over last five days

ISLAMABAD: The IMF’s structural benchmark for keeping the difference between interbank and open market rates of the US dollar against the rupee within the band range of 1.25 percent has been breached at least for the last five working days.

In the last five consecutive days, the difference ranged between 2 to 4 percent so the IMF might raise this issue in the upcoming parleys expected to be held at the end of October or early November 2023. Despite witnessing depreciation in the exchange rate, the State Bank of Pakistan (SBP) has so far remained unable to keep the difference in exchange rate within the desired limit of 1.25 percent on five consecutive working days.

The clearance of stuck-up containers at ports, payment of dividends, and removal of other restrictions have increased pressures on the exchange rate. Secondly, the IMF condition has been resulting in dollarisation because the interbank market was following the open market so everyone knows that investing in the dollar would increase benefits.

This scribe sent out a question to the SBP two days ago inquiring whether the agreed benchmark with the IMF was breached in the last five working days as the gap between the interbank and open market ranged around 4 percent. What’s the view of the SBP and how you ensured monitoring and then report it back to the IMF on a weekly basis?

The SBP’s spokesman replied on Wednesday and stated “We do not have any comment to offer”.

The IMF under Standby Arrangement (SBA) mandated spread not to be more than 1.25 percent in five consecutive business days on a weekly basis.

The rupee in the interbank market continues to slide as the rupee in the interbank market stood at Rs295 and in the open market around Rs305 so the difference stood at 3.4 percent. From January 1, 2023, to August 15, 2023, the rupee witnessed a devaluation of 22.32 percent against the US dollar.

Independent economists feared that episodes of exchange rate depreciation were continuously expected during the gradual return to a market-based exchange rate.

While the rupee experienced an appreciation following the IMF SBA, this effect was a combination of an increase in market confidence and depreciation of the US dollar. Because the trend depreciation since FY23 has been driven by a deterioration of economic fundamentals, the effect of increased market confidence was only temporary, and the rupee-dollar exchange rate has returned to pre-SBA levels.

The recent depreciation could be attributed to the return to a market-determined exchange rate and commitment of no formal or informal intervention in foreign exchange markets, SBP’s interventions to be guided by the overarching objective of increasing reserves to at least $6.4 billion (1 month of import cover) by end of December 2023 and reducing SBP’s net forward/swap position to below $4 billion.

The foreign exchange sales are not to be used to prevent a trend depreciation of the rupee driven by economic fundamentals. The policy rate was jacked up to 22 percent on June 26th, 2023, and will be further adjusted until inflation and inflation expectations are on a clear downward trend. The real policy rate (i.e., policy rate adjusted for inflation) might be brought into positive territory.

The withdrawal of a December 2022 circular issued to banks on prioritization in providing FX for certain types of imports, and a gradual phase-out of other FX and import restrictions, including the limitations on advance payments for imports against letters of credits (LCs) and advance payments beyond a certain amount per invoice (without LC) for the import of eligible items, and multiple currency practices also increased pressures on the exchange rate.