Rupee's fair value is under Rs240/$: Dar

Challenges IMF-backed flexible exchange rate policy, argues that stable currency would protect economy, public

ISLAMABAD:

Pakistan's Deputy Prime Minister Ishaq Dar said on Tuesday that, based on the economic fundamentals, the rupee's value should not be more than Rs240 to a dollar. He opposed a flexible exchange rate regime, arguing that it was damaging both the economy and the general public.

Speaking at the Pakistan China Institute forum, Dar also expressed hope for a major reduction in interest rates in the upcoming monetary policy committee meeting, citing a steep slowdown in inflation rates. According to the Real Effective Exchange Rate (REER) for September, the rupee-dollar parity should have been Rs235 to Rs240 to a dollar, said Dar, who is also the foreign minister. The REER is the inflation-adjusted value of the local currency compared to other currencies.

His statement aligns with some independent assessments, which indicate that the central bank has kept the rupee at an artificially lower value of Rs278 to a dollar. According to the September REER, the rupee is undervalued by Rs38 or roughly 16% per dollar. Dar stated that the higher dollar value was contributing to inflation and increasing the external debt burden.

The deputy prime minister further stated that he was not in favour of a free exchange rate regime, asserting that there should be only one indicator: the REER. Dar, who has been a strong proponent of a stable currency, clarified that this was his personal view.

One of the core objectives of the International Monetary Fund (IMF) programme is to establish "appropriate monetary policy to bring down inflation and exchange rate flexibility to aid in the rebuilding of reserves." At the time of the approval of the $7 billion programme last month, IMF directors emphasised the importance of allowing the exchange rate to serve as a shock absorber, enhancing competitiveness and helping rebuild reserves.

The IMF's recommendations included maintaining an appropriately tight monetary policy, with positive real interest rates on a forward-looking basis, ensuring exchange rate flexibility and proper functioning of the foreign exchange market, and strengthening institutional frameworks to safeguard financial sector stability. The IMF programme aims to bring Pakistan's gross reserves to at least three months of imports, supported by disbursements from multilateral and bilateral loans as well as foreign exchange purchases.

However, Dar contended that the IMF policy on the exchange rate has not significantly benefited Pakistan in the past. "Exports represent only 8% of the economy, and you harm the other 92% when you let the rupee free-fall. This is exactly what happened during the previous government," Dar said.

According to Dar, when the rupee is left to market forces, inflation rises, and interest rates are increased to curb it, creating "a vicious cycle that goes on and on." The deputy prime minister stated that Pakistan does not have an export surplus, and exporters begin manufacturing only after securing orders. Exporters can benefit from devaluation for six to seven weeks at best, Dar noted.

He explained that exports have a 65% imported component, meaning that "due to devaluation, general inflation increases, which hurts the general public." Dar further suggested that while no traditional war can be waged against Pakistan after it became a nuclear power, economic vulnerability could still be exploited, harming the country. He lamented that Pakistan's economy had been weakened under the previous government, pushing the nation to lower economic levels.

The Pakistani rupee remained largely stable on Tuesday against the US dollar, hovering at Rs277.63. Dar also expressed hope for a significant reduction in interest rates in the next monetary policy, which the central bank will announce on November 4th. "There is no reason to keep interest rates at 17.5% when inflation is down to 6.9%," Dar stated. He indicated there was room for a rate cut even if the central bank allowed a cushion for inflationary expectations.

Dar noted that exports were growing, and foreign remittances had increased significantly, but he cautioned that Pakistan was not yet out of its economic challenges. He also criticised those predicting Pakistan's default, arguing there was no need for alarm when the country held mineral reserves worth $10 trillion.

Chinese Ambassador Jiang Zaidong also addressed the forum, observing that Pakistan had made considerable progress in the past two years, with accelerated economic growth and reduced inflation. "When I came to Pakistan, the economy was contracting, but last fiscal year the growth rate reached 2.5%," Zaidong remarked. He added that the inflation rate had decreased from over 28% to 6.9%.