ISLAMABAD: With the exchange rate continuing to depreciate, Pakistani authorities are left with no other option than to request the International Monetary Fund (IMF) to reduce the gap between the fund’s interbank and open market dollar rates to 1.25. Revise the condition not to keep more than percent, it emerged on Tuesday.
Amid massive volatility in the currency market in recent days, the Ministry of Finance and the State Bank of Pakistan (SBP) remained silent on the depreciation of the rupee against the dollar.
However, many government sources claimed that newly appointed Finance Minister Dr Shamshad Akhtar is currently busy taking briefings from various ministries before finalizing a recipe to address the economic woes.
The Caretaker Prime Minister has selected two economists Dr. Shamshad Akhtar and Finance Advisor Dr. Waqar Masood to deal with the economic challenges.
The IMF’s $3 billion Standby Arrangement (SBA) program established a continuous structural standard whereby the average premium between interbank and open market rates would not exceed 1.25% over any five consecutive business days.
“This poorly structured benchmark has changed the dynamics of the money market as open market rates will begin to drive the exchange rate against the earlier behavior that used to be the driving force behind interbank exchange rate volatility,” he said. Top government sources confirmed while talking to JEE News.
Now the rupee has depreciated against the dollar in the open market and the rate has gone down to Rs 310 to Rs 315 depending on those who have valid travel documents including passports, visas and air tickets and those who Dollars are being bought purely for speculation.
On the other hand, the interbank market also saw a low of Rs 299 against the US dollar.
“This process may continue if the IMF keeps the rate between interbank and open markets above 1.25 percent as it has changed the dynamics of Pakistan’s money market. Now the caretaker government has to A request will have to be made to the IMF to review the quality of the policy framework,” said a senior official.
The State Bank has been continuously violating this condition for the past several days and there is no limit to keeping the exchange rate stable considering the volatile environment when Pakistan is desperate to attract dollar inflows. China is when emissions exceed funds by a substantial margin. .
Pakistan has secured $2.8 billion in time deposits and guaranteed loans from China as well as other multilateral and bilateral lenders. The State Bank received another $2.2 billion from the IMF and other bilateral lenders to increase foreign exchange reserves, but such dollar inflows failed to stabilize the exchange rate.
Currency markets remained volatile due to a variety of factors, including the lifting of import restrictions that widened the current account deficit to $1 billion in July 2023. Remittances and exports also fell short of the set targets. All these conditions put pressure on the exchange rate when the macroeconomic fundamentals do not reach the desired mark.
When contacted on Tuesday, former finance adviser Dr Khaqan Najib said that in the short term, the rupee is adjusting due to higher import numbers, clearance of backlog of containers. Declining inflows of remittances and exports and the interbank market are manipulating the curb market in hopes of meeting IMF structural standards.
One discomfort SBA may need to reconsider is specifying that the 1.25% spread between the curb and the interbank will not be breached for five consecutive days. He said the data points to a persistent breach of structural standards and that it appears difficult to maintain.
He found that importers are relying on the curb market as interbank liquidity is limited. It keeps the curb market moving along with buying the dollar as a safe store of value and closes the gap between the two rates following the interbank rising trend. He concluded by saying that it is important to build confidence, and give clear answers from the authorities about future economic plans and strategies to meet the IMF’s goals.
