Economics

Pak Rupee vs Dollar: Rupee Sinks As Pakistan Seeks IMF Bailout

Pak rupee vs Dollar IMF Bailout
Uzairmaqbool / Pixabay

Pakistani rupee plunged as much as 10% on Tuesday against the US dollar on a devaluation move by the State Bank of Pakistan (SBP). It was the fifth devaluation by SBP in less than a year. In contrast, the country’s stock market jumped nearly 3% as Pakistani government began preparation for the 13th IMF bailout in the last 30 years. The Pak rupee vs dollar rate plunged PKR 11.70 in the interbank market to hit a historic low of PKR 138 on Tuesday.

Has Pakistan ‘shot itself in the foot’ by devaluing Pak rupee vs dollar?

The Pak rupee vs dollar exchange rate has been declining consistently over the last few weeks. The exchange rate was PKR 127.80 on Saturday, according to Dawn News. Over the last few days, the open market rate has been PKR 4-5 lower than the interbank rate. The dramatic decline in the value of Pak rupee could trigger panic in the market. The State Bank of Pakistan wants to devalue the currency to secure a bailout package from the International Monetary Fund.

The IMF has demanded Pakistan to devalue its currency by as much as 15% before they would consider a bailout. IMF chief economist Maurice Obstfeld said Tuesday that the Pakistani rupee was “too rigid and overvalued.” Citing a broker, Reuters says the SBP has indicated that it wants the currency to go with the market forces. Even though the central bank’s official position is that the PKR trades freely, the currency is widely believed to be under a managed float.

An SBP spokesperson said, “The market is aware about the overall macroeconomic conditions and based on those conditions, they are having their own expectations about the exchange rate, so that is driving (the rupee valuations) currently.” The SBP has little firepower to bring the rate down considering its dwindling forex reserves.

Market experts told Dawn News that the Pak rupee vs dollar rate was already reflective of its true position, which means Islamabad need not devalue the currency further. One expert said the government had “shot itself in the foot” by devaluing Pakistani rupee on the IMF’s demand.

The shortage of forex reserves remains a major concern for the Pakistani economy. As of September, the central bank had only about $9 billion in forex reserves, which is barely enough to cover two months of imports. The country’s fiscal deficit was on track to hit the target of 7.2% of GDP for the current fiscal year. But the Imran Khan government has introduced austerity measures to bring it down to 5%.

The IMF had bailed out Pakistan in 2013 with a $6.7 billion package. The country would need a bigger amount this time to stabilize its economy and avoid default on loans. The current account deficit skyrocketed 43% to $18 billion in the fiscal year ending June 2018. The new government hasn’t specified how much money they need in forex reserves. But Finance Minister Asad Umar disclosed that external debt payments of around $8 billion were due by December 2018.

Can Pakistan avoid the ‘debt traps’?

Before offering the bailout package, the IMF could demand more structural reforms. The reforms could derail Imran Khan’s political agenda. Khan has promised to create millions of new jobs as well as an ‘Islamic welfare state.’ Given the current condition of the economy, his government may be forced to focus on increasing taxes and reducing government spending. Amid all this, the falling Pak rupee vs dollar could make things worse by increasing inflation.

Suleman Maniya of Shajar Capital told Reuters that approaching the IMF is a positive step as it will alleviate the underlying causes of worry. Islamabad had earlier said that reaching out to the IMF was the last option. The country wanted to approach friendly countries such as China and Saudi Arabia.

But Prime Minister Imran Khan has expressed concerns over Chinese “debt traps.” China has been offering loans to dozens of countries around the world, many of which have now found themselves in unavoidable ‘debt traps.’ As part of the China-Pakistan Economic Corridor (CPEC), Beijing has pledged to invest up to $60 billion in Pakistan. China has already loaned billions of dollars to Pakistan to prop up its forex reserves. The United States has warned that it doesn’t want the IMF bailout package to be used to pay off the Chinese loans.

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