- The IMF wants Pakistan to adopt a market-based exchange rate
- Pakistan urgently needs IMF funding
- Banks should be told to deliver dollars to exchange companies
- Artificial shell of Pakistani rupee encouraged black market
- FinMin Ishaq Dar’s bids to defend the rupee are against IMF advice
KARACHI, Pakistan, Jan. 25 (Reuters) – The Pakistani rupee weakened 1.2% on Wednesday after currency firms removed a cap on the currency, saying it was creating “artificial” disruptions to an economy in urgent need of help from the International Monetary Fund .
The move to a market-based exchange rate should satisfy the IMF, as that is one of the conditions set by the multilateral lender before it agrees to open a stalled rescue program for Pakistan.
Finance Minister Ishaq Dar’s attempts to defend the rupee, including intervention in the foreign exchange market, went against IMF advice.
The central bank is fighting its highest inflation rate in decades and has raised interest rates sharply, but the country barely has enough foreign exchange reserves to cover three weeks of imports and is struggling to meet its external financing obligations.
The Exchange Companies Association of Pakistan (ECAP) said late on Tuesday that it is lifting the cap on the currency in the interest of the country.
“We have decided that we will bring the exchange rate to the same level as what we provide to the banks against credit cards,” ECAP Secretary General Zafar Paracha said in a statement, adding that the level is 255 to 256 rupees per dollar.
The rupee closed at 240.60 against the US dollar and bid at 243 in early open market trading on Wednesday, ECAP said in a statement, compared to a range of 237.75/240 at close on Tuesday.
On the interbank market, the rupee depreciated 0.49 rupees or 0.21% against the dollar.
The official value of the rupee has depreciated by 11.23% against the dollar since the start of the 2022-2023 fiscal year, which ends on June 30.
Before the cap was removed from the rupee, markets looked at three different rates to judge its value: the official rate set by the state bank, the rate rated by the currency companies, and the black market rate.
“We think the dollar rate at banks could drop by as much as 5% in a matter of days,” said Mohammed Sohail, CEO of brokerage firm Topline Securities.
ECAP President Malik Bostan told Reuters that the central bank gave assurances at a meeting that commercial banks would be instructed to supply currency exchange firms with dollars within a week.
“We’re running short. We don’t have physical dollars,” Bostan said. “People don’t sell dollars. They just buy.”
He said removing the cap would curb black market trading, although it would take time to bridge the gap.
“The price on the black market is stuck between 260 and 270. The decision of exchange companies as such has not had any impact,” said Fahad Rauf, head of research at Ismail Iqbal Securities.
Stock market investors reacted positively to the decision to lift the currency cap, with the Pakistan Stock Exchange’s (PSX) benchmark index (.KSE) rising 1.77%. Topline’s Sohail said investors hoped removing the limit would help the IMF resume disbursements.
The IMF has yet to approve its ninth revision to release $1.1 billion, originally due to be disbursed in November last year. The fund wants Pakistan to cut subsidies, reduce energy sector debt and raise taxes to reduce the budget deficit, and transition to a market-based exchange rate.
Prime Minister Shehbaz Sharif said on Tuesday that his country is ready to discuss any IMF demands.
There was no hike in future interest rates released by the central bank on a daily basis on Wednesday. After the sharp fall early in the day, the rupee held steady until market close.
Rauf said stock exchange companies have become irrelevant in the face of the growing black market.
“The government and the central bank need to speed up the pace of the release of currency controls, otherwise the black market will continue to thrive,” he added.
Reporting by Ariba Shahid in Karachi and Asif Shahzad in Islamabad; Edited by Kim Coghill, Simon Cameron-Moore and Christina Fincher
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