Dollar released from Dar(kness): Pakistan moves to convince IMF

Almost everyone saw it coming—everyone, except perhaps, Finance Minister Ishaq Dar who remained convinced that the rupee, even at around 225, was not a reflection of its true value. He meant it the other way, of course.

Widely seen as an advocate of a strong currency, Dar took over the post of finance minister at the end of September last year, replacing fellow party member Dr Miftah Ismail.

Among his first few statements were comments on the exchange-rate parity.

“The rupee’s real value is below 200 (to $1), and, God willing, it will come below 200 (rupees),” Dar had said on several occasions after he arrived in Pakistan.

On expectation of his arrival and after, the rupee appreciated, mostly driven on sentiment.

The US dollar retreated from around the 239 mark to under 218 in a matter of a couple of weeks. Since then, however, the rupee remained largely stable but on Thursday (January 26, 2023), it became significantly worse. It finished at 255.43, a loss of Rs24.54 in a single day, in the inter-bank market.

The development did not come in isolation.

During this time, Pakistan scrambled to ensure dollar inflows as policymakers looked to convince ‘friendly nations’, and other multilaterals. The inflows, to the extent the government had hoped, never arrived.

Instead, Pakistan saw its ninth review of the International Monetary Fund (IMF) programme getting delayed. Its last review, which was clubbed with the previous one, was approved in August.

As the bailout programme remained stalled, foreign exchange reserves held by the State Bank of Pakistan (SBP) depleted at a fast pace, falling from around the $9-billion mark at the start of September to below $5 billion at the end of December.

The sense of urgency could not have been greater. But the rupee’s stability in the inter-bank market, which many termed as artificial and through administrative measures, meant it was difficult to convince the IMF, especially seeing that other prior conditions – including taxation measures, fiscal consolidation, increase in gas/electricity tariffs, reduction in circular debt – remained unmet as well.

Such was the lack of progress on this front that many questioned the government’s intent on whether or not it was willing to complete the IMF programme.

However, days ago and even before on multiple occasions, Prime Minister Shahbaz Sharif reinforced the government’s wish to complete the programme.

“We have given the IMF a clear message that we want to complete the ninth review. We are ready and want to sit down regarding your conditions so that it can be concluded and Pakistan can move forward,” said PM in an address on Tuesday.

Policy rate hike unlikely to appease IMF: economists

A mere 48 hours later, the measures started to kick in:

The authorities let the exchange rate float freely, and Pakistan’s rupee responded.

The PKR saw its worst fall in absolute terms in history, and its second-worst day in terms of percentage in the inter-bank market.

The dollar was finally free from its Dar(kness).

“Now it looks like that amid desperate efforts to revive IMF funding, PKR is moving back to market forces,” said Topline Securities in a note on Thursday.

“This adjustment, we think, is also in line with what the IMF has urged repeatedly that the exchange rate should be driven by market forces and it should not be managed,” it added.

Exchange companies set to remove ‘self-imposed price cap’ on open-market dollars

Other measures

Business Recorder reported on Thursday that the Federal Board of Revenue (FBR) has drafted proposals for new taxation measures of nearly Rs300 billion to be enforced through the promulgation of the Tax Laws Amendments Ordinance, 2023, which is expected to be promulgated during the next 7-10 days.

Tahir Abbas, Head of Research at Arif Habib Limited (AHL), said the government would also increase the gas and electricity tariff, another prerequisite of the IMF, in the coming days.

Moreover, the Petroleum Development Levy (PDL) and General Sales Tax (GST) on petroleum products are also reported to be raised as well, he said.

“We expect the IMF programme to resume in February,” added Abbas.

However, the market expert said inflation rate, already well above the 20% level, is expected to hit 28-30% after these measures.

Experts have regularly pointed that resumption of the IMF programme, under which the lender was supposed to disburse over $6.5 billion to Pakistan, is crucial to revive the cash-battered economy.

Their calls came as Pakistan slid dangerously close to a debt default in recent months, driving its bond yields to distressed levels as IMF loan payments were held up.