Pakistani rupee plummets as markets adjust to removal of unofficial controls

Central bank data showed the Pakistani rupee fell 9.6% against the dollar on Thursday – its biggest single-day drop in more than two decades – in a possibly convincing drop. The International Monetary Fund continues to lend to the country.

The drop came a day after foreign exchange firms lifted exchange rate ceilings, a key requirement of the IMF as part of an economic reform program it has agreed with the South Asian nation. lack of cash.

The central bank said the official value of the currency closed at 255.4 rupees against the dollar versus 230.9 on Wednesday.

Faced with a severe balance of payments crisis, Pakistan desperate to secure outside financing, with less than three weeks of imports in its foreign exchange reserves, which fell $923 million to $3.68 billion in the latest data.

Pakistan received a $6 billion bailout package from the IMF in 2019. The money was added by another $1 billion last year to help the country after the devastating floods, but the IMF later dropped it. halted disbursement in November as Pakistan failed to make more progress in fiscal consolidation.

The lender announced on Thursday that it will send a delegation to the country at the end of January to discuss the resumption of the program.

Besides wanting the government to implement fiscal measures, the IMF is pushing the government to move to a market-determined exchange rate regime, which the IMF highlighted in its statement on Thursday.

Foreign exchange firms said on Wednesday they were removing the cap in the country’s interest, because it was causing “artificial” distortions to the economy.

Wednesday’s move by foreign currency dealers, whose open market rates differ from those announced by the central bank, had a cascading effect on Thursday’s official exchange rate.

According to JS Global, a Pakistani brokerage, the official rate drop was the largest since 1999 in both absolute numbers and percentages.

On the open market, the rupee weakened from 243 rupees per dollar to 262, down about 7% after losing 1.2% the previous day, according to trade data by the Pakistan Exchange Companies Association ( ECAP).

“We’ve asked the central bank to raise the interbank rate to help combat the black market,” ECAP President Malik Bostan told Reuters.

The State Bank of Pakistan (SBP) and the finance ministry did not respond to Reuters’ request for comment.

Finance Minister Ishaq Dar’s efforts to protect the rupee since his appointment in September, including his reported money market interventions, have gone against the advice of the IMF.

However, the Pakistan Stock Exchange reacted positively to the rupee’s drop, with the KSE 100 index gaining more than 1,000 points, or 2.5%.

Tahir Abbass, head of research at Arif Habib Limited, said: “The devaluation of the rupee will remove some uncertainty about the economic path forward and the resumption of the IMF programme, which is what The market is reacting positively.”

Topline Securities, a brokerage based in Karachi, said a sharp drop in foreign exchange reserves from $8 billion in September to $4.6 billion on January 13 has resulted in a disparity between The official rate and the market rate were more open, creating a dark wave at the same time. market for dollars due to low supply.

The sudden interest rate cut has had a strong impact on banks. According to two officials at commercial banks operating in Pakistan, banks that previously borrowed at a rate of 230 rupees to one dollar for settlement by running open positions now have to settle the payments. at the rate of 250 rupees.

The officials, who spoke on condition of anonymity, told Reuters that the hardest hit banks were those that didn’t have enough dollars inflows.

While the move increases the chances of restarting IMF funding, Pakistan is also reeling from decades-high inflation, which economists fear will get worse. Most of Pakistan’s important imports, including fuel, are paid for in dollars.

“This will provide significant impetus to address the already high price pressures in the economy,” said Sakib Sherani, a Pakistani macroeconomist, adding that the price index Consumer spending (CPI) is heading towards unprecedented levels in the country.

In the first half of the current financial year, which ends in June, inflation averaged 25%. The central bank is also tightening monetary policy aggressively, with key interest rates also at their highest levels in decades and growth already stalled.

The next economic crisis will also put political pressure on the government, with former prime minister Imran Khan demanding a snap general election.


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