A delay in the agreement between Pakistan and the International Monetary Fund (IMF), which has raised uncertainty in the nation’s political and economic spheres, is blamed by experts for the currency’s decline.
The delay in the agreement with the IMF was cited by Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan (ECAP), as the market’s top concern.
Uncertainty had been caused by the lender’s requirement that the exchange rate be tied to that of the black market, he claimed. The current exchange rate, in Paracha’s opinion, is too high and shouldn’t have increased as much as it did. He also mentioned that the previous day, the dollar was being traded on the black market for Rs290.
PTI Chairman Imran Khan criticized the government for the decline, calling it the “slaughter” of the rupee. He attributed the 62% loss of the rupee or 110/$ in 11 months to the regime change conspiracy, which resulted in a bunch of criminals foisted upon the nation by a former army chief. The rupee’s decline has led to a historic 75-year high inflation rate of 31.5%, increasing public debt by Rs 14.3 trillion.
Since the beginning of February, Pakistan and the IMF have been negotiating to sign a staff-level agreement that will permit increased inflows from other bilateral and multilateral lenders. The IMF will release a tranche of more than $1 billion from the $6.5 billion bailout deal agreed upon in 2019 once the agreement is signed.
However, the lender is still in talks with Islamabad regarding the debt owed by the power sector and a potential rise in the policy rate, which is currently 17%.
Pakistan has already implemented a number of measures to raise money to close the fiscal deficit, including adopting a market-based exchange rate, raising fuel and electricity prices, eliminating subsidies, and raising taxes.
These actions, however, are probably going to further slow down the economy and raise inflation. Since the country’s foreign exchange reserves have fallen to just $3 billion, which is barely enough to cover three weeks’ worth of imports, the economy is in shambles and in desperate need of outside funding.
A new prescription from the IMF for Pakistan suggests further rupee depreciation against the US dollar. Since there is an incentive of Rs. 20 against the US dollar in the Peshawar market, the lender demands the placement of a market-based exchange rate equivalent to the level of higher side prevalent in the bordering areas adjacent to Afghanistan.
The IMF and Pakistan’s economic team are now debating this new recommendation because it is not practical to replicate it across the entire country of Pakistan.
