- The biggest day in two decades is coming: analysts
- The Pakistani rupee has been in free fall since the artificial cap was lifted
- The purpose of this movement is to fulfill the demands of the IMF
- Pakistan desperately needs external finance to avoid crises
- Economists expect record inflation in the future
KARACHI, Pakistan, Jan 26 (Reuters) – 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 rout that may have satisfied the International Monetary Fund. make it start again. lends to the country.
The drop comes a day after foreign exchange firms lifted a cap on the exchange rate, a key demand from the IMF as part of a program of economic reforms it agreed with the Southeast Asian nation.
The official rate of the currency ended at 230.9 255.4 rupees against the dollar 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 imports in its foreign reserves, which fell by $923 million to $3.68 billion in the latest data.
In 2019, Pakistan received 6 billion dollars from the IMF. Another $1 billion was added last year to help the country after devastating floods, but the IMF later suspended the money in November because Pakistan failed to make further progress in fiscal consolidation.
The lender announced Thursday that it is sending a mission to the country at the end of January to discuss restarting the program.
In addition to requiring the government to take fiscal measures, the IMF is pressing it to move to a market-determined exchange rate regime, which the IMF highlighted in a statement on Thursday.
Foreign exchange firms said on Wednesday they lifted the bond for the sake of the country, saying it would cause “arbitrary” distortions to the economy.
Wednesday’s move by foreign exchange dealers, whose open market rates differ from the rate announced by the central bank, had an impact on official exchange rates on Thursday.
The fall in the official rate was the biggest in both absolute and percentage terms since 1999, according to JS Global, a Pakistani brokerage house.
In the open market, the rupee fell from 243 rupees to 262 to the dollar, a drop of about 7%, after losing 1.2% the previous day, according to trading data from the Exchange Companies Association of Pakistan (ECAP).
“We have asked the central bank to increase the interbank rate (rate) to help fight the black market,” ECAP head Malik Bostan told Reuters.
The State Bank of Pakistan (SBP) and the finance ministry did not respond to a Reuters request for comment.
Finance Minister Ishaq Dar’s efforts to protect the rupee since taking office in September, despite reported interventions in the currency market, have gone against the advice of the IMF.
A POSITIVE ANSWER
However, the Pakistan Stock Exchange reacted positively to the rupee’s decline, with the KSE 100 index rising by more than 1,000 points, or 2.5%.
Tahir Abbass, Head of Research at Arif Habib Limited, said: “The appreciation of the rupee removes some uncertainty about the economic road map ahead and the resumption of the IMF program, to which the market is responding positively.”
Topline Securities, a Karachi-based brokerage, said a sharp drop in foreign reserves from $8 billion in September to $4.6 billion as of January 13 led to a widening of the spread between official and open market rates, and a black rate. made market for dollars due to low supply.
The sudden drop in rates hit the banks hard. According to two officials of commercial banks working in Pakistan, banks that used to lend at 230 rupees to the dollar to fund open positions now have to pay at the rate of 250 rupees.
Officials told Reuters on condition of anonymity that the banks that suffered the most were those that did not have enough dollars.
DECADES OF HIGH INFLATION
While the move boosts the chances of resuming IMF funding, Pakistan is also reeling from decades-high inflation, which economists fear is now set to worsen. Most of Pakistan’s critical imports, including fuel, are paid in dollars.
“It will give a significant boost to price pressures in the economy,” said Sakib Sherani, a Pakistani macroeconomist.
In the first half of the current fiscal year, which ends in June, the average inflation has been 25%. The central bank is also tightening monetary policy, with key rates at decade highs and growth stalling.
The looming economic crisis will also put political pressure on the government, with former prime minister Imran Khan calling for early general elections.
Reporting by Ariba Shahid in Karachi and Asif Shahzad in Islamabad; Writing Gibran First; Editing by Muralikumar Anantharaman, Shri Navaratnam and Simon Cameron-Moore
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