The Pakistani rupee fell 9.6% against the dollar on Thursday, central bank data showed – the biggest one-day drop in two decades – in a slump that could prompt the International Monetary Fund to resume lending to the country. .
The decline came a day after foreign exchange firms lifted caps on exchange rates, a key demand of the IMF as part of a program of economic reforms it has agreed with the cash-strapped South Asian nation.
The official value of the currency closed at Rs 255.4 against the dollar as against Rs 230.9 on Wednesday, the central bank said.
Facing an acute balance of payments crisis, Pakistan is desperate to secure external financing, with less than three weeks’ worth of import cover in its foreign exchange reserves, which fell by $923 million to $3.68 billion in the latest figures Is.
Pakistan secured an IMF bailout of $6 billion in 2019. It was topped with another $1 billion last year to help the country after devastating floods, but the IMF suspended disbursements in November because of Pakistan’s failure to make more progress on fiscal consolidation.
The lender announced Thursday that it is sending a mission to the country in late January to discuss restarting the program.
Besides wanting the government to take fiscal measures, the IMF is pushing for it to move to a market-determined exchange rate regime, the IMF highlighted in its statement on Thursday.
‘artificial’ distortions
Forex firms on Wednesday said they have removed the limit for the sake of the country, as it is creating “artificial” distortions for the economy.
Wednesday’s moves by forex dealers, whose open market rates differ from those notified by the central bank, had a cascading effect on official exchange rates on Thursday.
According to Pakistani brokerage house JS Global, the decline in the official rate was the biggest in both absolute and percentage terms since 1999.
According to trade data from the Exchange Companies Association of Pakistan (ECAP), the rupee weakened from Rs 243 to Rs 262 against the dollar in the open market, a fall of nearly 7 per cent against a 1.2 per cent fall on the previous day.
“We have requested the central bank to raise the interbank (rate) to help combat the black market,” ECAP president Malik Boston told Reuters.
The State Bank of Pakistan (SBP) and the Finance Ministry did not respond to Reuters requests for comment.
Efforts by Finance Minister Ishaq Dar to protect the rupee since his appointment in September, including reported currency market interventions, were contrary to IMF advice.
positive feedback
However, the Pakistan Stock Exchange reacted positively to the rupee’s decline, with the KSE 100 index climbing over 1,000 points, or 2.5%.
Tahir Abbas, head of research at Arif Habib Ltd, said, “The rupee depreciation removes some uncertainty about the further economic roadmap and resumption of the IMF programme, to which the market is reacting positively.”
Topline Securities, a Karachi-based brokerage house, said foreign exchange reserves fell from $8 billion in September to $4.6 billion on January 13, widening the spread between official and open market rates and creating a black market. Market for dollars due to short supply.
Banks have been hit hard by the sudden drop in rates. According to two officials of commercial banks operating in Pakistan, banks which had earlier borrowed Rs 230 from the dollar to pay for running open positions, will now have to pay at the rate of Rs 250.
The officials told Reuters on condition of anonymity that the banks that have been hit the hardest do not have enough dollars flowing in.
decade-high inflation
While the move raises the prospect of a resumption in IMF funding, Pakistan has also been battling decades of high inflation, which economists fear will worsen. Most of Pakistan’s vital imports, including fuel, are paid for in dollars.
“This will give a significant stimulus to already elevated price pressures in the economy,” said Saqib Sherani, a Pakistani macroeconomist, adding that consumer price index (CPI) numbers are rising towards previously unseen levels in the country.
In the first half of the current fiscal year, which ends in June, average inflation has been 25%. The central bank is also increasingly tightening monetary policy, with key rates at decade-highs and growth coming to a screeching halt.
The upcoming economic crisis will also put political pressure on the government with former Prime Minister Imran Khan Demand for snap general election
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(This story has not been edited by News18 staff and is published from a syndicated news agency feed)