Rupee under pressure: IMF agrees to delay in interest rate increase

In its place, Pakistan will step up dollar purchases from open market.


Shahbaz Rana August 26, 2013
As part of the same plan, the SBP postponed its Monetary Board meeting slated for August 27, which was initially expected to increase the discount rate – a rate at which the central bank lends money to commercial banks. PHOTO: FILE

ISLAMABAD:


The International Monetary Fund (IMF) has accepted Pakistan’s request for a delay in interest rate increase at least until the first review meeting of the Fund and in return it will triple the amount required to be mopped up from the open market to build foreign currency reserves.


The move is aimed at appeasing the industrialists but the rupee is coming under further pressure, as the State Bank of Pakistan’s drive to buy dollars from the market is leading to a faster depreciation, making oil and food imports expensive, said sources in the Ministry of Finance.

The rupee further shed its value in the interbank market on Monday noon and was traded at 103.80 against the US dollar.

As part of the plan, the SBP postponed its Monetary Board meeting slated for August 27, which was initially expected to increase the discount rate – a rate at which the central bank lends money to commercial banks.



The SBP had notified board members that the meeting would be held on Tuesday (today), confirmed a board member.

According to steps agreed earlier, Pakistan had to use a combination of exchange rate and interest rate to build the reserves, the sources said. It was supposed to buy $125 million and increase the interest rate by a minimum of 100 basis points. Now the foreign currency purchase has been increased to $375 million.

“By not increasing the interest rate on August 27, we did not want to give any weak point to the IMF Executive Board, which will meet on September 4 to consider Pakistan’s request for a $6.6 billion loan programme,” said a senior finance ministry official on condition of anonymity.

The SBP has now decided to announce the monetary policy on September 13 and the board will meet a day earlier.

SBP spokesman Umar Siddique insisted that the meeting was delayed because of Eid and Independence Day holidays. Since August inflation figures would be announced on September 1, there was no reason for holding the meeting just four days before the data was out, he said.

However, his arguments seem to be unconvincing as the holidays did not come out of the blue and the inflation figures, though officially announced on the first of every month, are available unofficially after 25th of the month.

The Pakistan Bureau of Statistics collects inflation data from 15 to 15 of every month and finalises its calculation in the next 10 days.

One of the reasons behind the delay in board meeting was that the authorities were expecting a further increase in inflation in August following a breakdown in supply chain because of floods and increase in power tariffs for industrial and commercial consumers.

In July, inflation was 8.3% and experts were expecting the figure to go up to 8.7%, putting the SBP under pressure to increase the interest rate and strengthening the IMF’s case.

According to independent economists, the SBP’s purchase of dollars is improving liquidity as the bank is throwing rupee in the market. Despite that, the liquidity came under pressure due to a desperate federal government that borrowed an unprecedented Rs612 billion in first 39 days of coming to power.

Finance Secretary Dr Waqar Masood said banks heavily disinvested treasury papers in the hope of increase in the interest rate, which increased government’s dependence on SBP borrowings.

On the back of market operations and a 100-million-euro loan from the Islamic Development Bank, the central bank’s reserves stood at $5.228 billion on August 16. But they dropped immediately after the country repaid $393 million to the IMF on Monday.

This will again push the SBP to buy dollars from the market, bringing the rupee under further pressure until the central bank uses the combination of exchange rate and interest rate.

Dismissing any tacit understanding with the IMF on allowing depreciation of the rupee, Finance Minister Ishaq Dar said “Pakistani rupee will be stabilised through natural devaluation.”

Published in The Express Tribune, August 27th 2013.

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COMMENTS (14)

Asad Malik | 10 years ago | Reply

@SHB It baffles me that after experiencing disastrous 6 years of democracy people like you still cling to it.Musharraf was the best lead in 2 decades,till 2008 i.e the Musharraf era rupee was stable(euro was 100,dollar was 78).Musharraf was a brilliant visionary,he created HEC and started to promote higher education,he saved us from an unwanted american incursion after 9/11,he mitigated further devastation of Pakistan and all did to prevent any havoc for the state He is the only proud president who came back to Pakistan to fight the absurd charges levied against him and the same corrupt judiciary and politicians now leagued up to punish him for being a good leader.Pakistan economy was stable and flourished ONLY during his leadership .FOr me results are what i consider important and past 6 years have been NUKING for Pakistan,Yours friendly Mr 10% and his ivy league and now this PML N (same clone) will destroy the economy till ignorant people like you grow brains instead of stacking hay in your skull.Democracy is not the solution (because criminal get elected anyway,,thank to pious poll rigging which you are so fond of).The only institution that maintains true discipline is the Armed forces,,judiciary and politicians are the one that would lead this country to its final demise.Every one makes mistakes;sadly Musharraf made a few and these ducklings in power never let a chance get by.

SHB | 10 years ago | Reply

@Abdullah Khan: With all due respect to you, I would say , you are partly correct. How you explain the palace bought by Musharraff in London ? By the way during his time the foreign loans were decreased by tree or four billion dollars and by the time he left they had increased to 37 billion dollars if my memory is working right. He started from 33 billion dollars of loan.

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