Reacting to Prime Minister Shehbaz Sharif’s statement that the International Monetary Fund (IMF) conditions are tough, the domestic currency dived almost 2% – or Rs5.22 – to hit a new all-time low closing at Rs276.58 against the US dollar in the interbank market on Friday.
The latest drop in the rupee-dollar exchange rate is partly attributed to a fresh fall in the country’s foreign exchange reserves. The central bank reported on Thursday that forex reserves have depleted by $592 million to $3.08 billion at present. The reserves, which stand at a nine-year low, are barely enough to finance imports over the next two to three-weeks.
Speaking to the Express Tribune, JS Global Head of Research, Amreen Soorani said, “We urgently need fresh inflows of foreign currency to stabilise the external economy and consolidate the rupee.”
Multilateral and bilateral creditors shall unlock their committed funds to Pakistan after the government achieves staff level agreement with the IMF during the ongoing negotiations. The latest devaluation is partly observed in reaction to the conflicting reports coming in from the ongoing talks between Pakistan and the IMF in Islamabad.
“The rupee has devalued in reaction to the PM’s statement that the conditions set by the IMF are tough,” said Soorani.
Reports suggest that the lending institution has recommended the government increase general sales tax (GST) by one percentage point to 18% across the board, while the government has informed the IMF that its inflows for export earnings and workers’ remittances may remain low in the current fiscal year 2023, compared to initial estimates.
The government is making an all-out effort to resume the stalled programme to fetch the committed inflows of $7 billion. It has implemented almost half of the IMF conditions, while the remaining conditions are expected to be met in the days to come.
“News reports suggest, however, that the IMF is apparently not happy with the government’s efforts so far and wants it to take more steps on additional taxes, energy tariffs and circular debt,” she explained.
Soorani stated that a further delay in the IMF staff level agreement and subsequent pause on expected inflows of new foreign debt will result in the rupee losing its value significantly, going forward. She, however, anticipated that the government will win the IMF’s approval at the conclusion on February 9, 2023, helping the rupee consolidate around the current levels.
The domestic currency has continued to face freefall in the past seven working days (except on one-day) since the government reinstated the market-based exchange rate mechanism on recommendation of the IMF last week. The currency has cumulatively plunged by a net 16.52% – or Rs45.69 – in the seven days to date from Rs230.89 closing on January 25, 2023.
Pak-Kuwait Investment Company (PKIC) Head of Research, Samiullah Tariq said, “The rupee-dollar exchange rate may consolidate in the range of Rs265-275 under the current cycle of devaluation, as demand for the foreign currency stands significantly high compared to supply.”
Later on, the exchange rate will continue to depreciate by an average 5% each year (or almost by half a percentage point each month) to adjust for the inflation reading in Pakistan and globally.
RDA inflows falls to $110m
Meanwhile, foreign currency inflows from overseas Pakistanis through Roshan Digital Accounts (RDAs) slumped to a 26-month low at $110 million in January 2023 amid high political and economic crises in the country. The government launched RDAs for non-resident Pakistanis in September 2020.
So far, overseas Pakistanis have deposited and invested a gross $5.7 billion through RDAs. Most of the amount was invested in Naya Pakistan certificates.
Published in The Express Tribune, February 4th, 2023.
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