ISLAMABAD/LAHORE - The Pakistani rupee tumbled as much as 10 percent Tuesday against the dollar after the government’s decision to seek a bailout package from the International Monetary Fund to stem a balance of payments crisis.
The US dollar touched historic high of Rs138 in open market on Tuesday. In interbank, the dollar value increased to Rs134 as against Rs124.35 when the market closed on Monday. However, the government’s decision of going for new IMF loan resulted in increase of dollar value by Rs9.75 in a single day.
Analysts say the rupee depreciation would fuel inflation and would increase the public debt of the country. Public debt would enhance by over Rs900 billion due to the recent rupee depreciation.
“There are speculations in the market that government will devalue the local currency after taking IMF programme, which resulted in higher demand of dollar,” said a currency dealer. He added that federal government and State Bank of Pakistan apparently decided not to intervene in the market to control the rupee depreciation.
The government on Monday finally decided to take IMF bailout package to avert the balance of payments crisis.
Pakistani currency is under pressure since December last year. Dollar value has sharply gone up around five times in last 10 months or so due to multiple reasons.
The dollar value remained at around Rs100 during first four and half years of the PML-N government. Rupee rates to the dollar were Rs98.81, Rs101.78, Rs104.84 and Rs104.85 on 30th of June of 2014, 2015, 2016 and 2017 respectively. However, since December 2017, dollar has gone up to Rs138.
The Ministry of Finance and State Bank of Pakistan has not taken any measure to control the rupee depreciation and allowed the market to set the currency value.
The IMF had recently termed the exchange rate as ‘overvalued’. It stated that policies should include more exchange rate flexibility and monetary policy tightening. The IMF during the recent talks with Pakistan had noted that government should devalue its currency by 15 percent during ongoing fiscal year.
According to a media report, State Bank of Pakistan had viewed that the exchange rate of Rs137 to a dollar by the end of current fiscal year in June 2019 would be sufficient to address the challenges. However, the IMF had believed that the rupee to be traded above Rs145 to a dollar.
An official of the Ministry of Finance said that tumbling foreign exchange reserves were one of the reasons of rupee depreciating. The reserves had fallen to $8.4 billion last week, which were enough to cover only one and half month’s imports bill. The State Bank’s reserves had decreased by $627 million in just one week to $8.409 billion due to payments on account of external debt servicing. Meanwhile, Pakistan would have to repay $1.2 billion in next couple of months (October and November), which would further erode the reserves.
“The economy would stabilise once Pakistan would receive funds from the IMF,” said a market analyst. “I don’t think it will go up to Rs150, the government won’t allow the economy to spin out of control,” he added.
Experts said the Real Effective Exchange Rate (REER) Index as of Aug 2018 was reported at around 112, when the rupee was at around Rs124.
Muhammad Fawad Khan, financial expert from BMA Capital Management Ltd, stated the government’s much-awaited decision to seek IMF assistance was a step in the right direction and accordingly set the stage for a much-needed repair of Pakistan’s external account. However, the road to formal approval and disbursement of IMF support was both bumpy and protracted because of the possible delay in negotiations and agreement on further policy action.
Given the funding gap of USD8-10b, the government will also need to build up foreign exchange reserves by issuing Euro/Overseas bonds (USD2-3bn) and seeking support from friendly countries.
A financial expert from Topline observed that it was high time that the government finally decided to seek the IMF bailout. Other than low foreign exchange reserves at $8.4b, not sufficient for two months imports, the country posted Jul-Aug Current Account Deficit (CAD) of $2.7b, up by 10 percent.
He was of the view that government’s decision to approach the IMF was a positive development and the IMF programme will eventually lead to the much needed fiscal discipline and stabilization process.
The business community has criticised the rupee devaluation and urged the government to direct Ministry of Finance and State Bank to immediately intervene in the matter of rupee devaluation as it was bound to hit all the sectors of economy hard.
UBG chairman and FPCCI former president Iftikhar Malik said the IMF programme will come with specific external, fiscal and monetary measures, which will likely result in slowdown in GDP growth to around 4 percent compared to GDP growth of 5.8 percent in FY18, besides further hike in interest rates. He said the State Bank has already raised interest rates by 275 basis points to 8.5 percent in calendar year to date.
Iftikhar Malik said that an unchecked increase in the dollar rates was multiplying the cost of doing business and badly affecting the industrial, manufacturing and agriculture sectors as Pakistan had to import fertilizers, food items, oil, machinery and industrial raw material.
LCCI former vice president Kashif Anwar said that he was expecting another hike in gas and electricity tariff by reducing energy related subsidies, containing the burgeoning fiscal account as well as circular debt. The government has already hiked gas tariff on average by 35 percent and more could follow.
Taxation measures will be adopted to reduce the fiscal deficit over and above the recently announced mini-budget.
There will be a cap on borrowing from State Bank to contain monetary expansion and inflation pressures and floor on FX reserves to maintain adequate level of reserves.
The government now will have to increase regulatory duties (RD) and customs duty (CD) on imports to contain trade deficit.
LCCI President Almas Hyder said government should start immediate consultation with the stakeholders as increase in dollar value would spoil trade and economic activities, besides hitting the common man.
He said that massive devaluation of rupee will reignite high inflation and halt growth by hitting all the important sectors of economy. Dollar price will lead to increase in import costs, hike in POL prices etc,” the LCCI president said.
“It seems windfall for exporters but it would not last long. Our competing countries are also devaluing their currencies and we must maintain our competitiveness,” the LCCI president added.
Almas Hyder said that government, Ministry of Finance and State Bank needed to ascertain the factors weakening the value of rupee and check the possibilities of undue speculations and panic buying. This will help stabilize rupee and restore the confidence of the business community.
Pakistan has not approached:IMF
The International Monetary Fund said Tuesday Pakistan has not approached the body to begin negotiations for a possible bailout to stem a balance of payments crisis, hours after Islamabad announced it will enter talks.
“We have not been formally approached yet,” said Maurice Obstfeld, the IMF’s top economist, during the fund’s annual meeting in Bali Tuesday.
The IMF’s comments added to the appearance of confusion around the abruptly announced decision.
“We will be listening very, very attentively when and if they come to us,” said Obstfeld. “Pakistan is suffering from a number of imbalances: A very large fiscal imbalance. A large current account imbalance. They also have a low level of reserves and a currency that is too rigid and overvalued,” he added.
Analysts say Pakistan needs a loan of around $12 billion to turn the corner, but a diplomat told AFP in August that Islamabad is betting on a loan of at least $6.5 billion to get it through the crisis.
However the US, one of the IMF’s biggest donors, has raised fears Pakistan could use any bailout money to repay mounting loans from China, sparking criticism from Islamabad.
That has also increased fears that the terms of any IMF programme could be more restrictive than in the past, undercutting Khan’s welfare drive.
The IMF has also warned the new government that growth would likely slow and inflation rise further if it does not act fast.