Future projection: IMF sees 13% depreciation of Pakistani rupee

Average exchange rate for the current fiscal year is being worked out at Rs111.4 to a dollar.

Shahbaz Rana July 24, 2014

ISLAMABAD: The International Monetary Fund has taken into account the rupee-dollar parity at Rs113.7 to a dollar while making projections for the current fiscal year – a rate that implies over 13% depreciation of the Pak rupee against the greenback.

Though the Washington based lender has not explicitly stated the exchange rate in its latest report on Pakistan, the projections for the current account deficit and the nominal size of the economy suggest that it considers the rupee as overvalued.

The average exchange rate for the current fiscal year is being worked out at Rs111.4 to a dollar by the IMF.

The IMF also raised a red flag over the appreciation of the nominal exchange rate during the last fiscal year and stressed that a more flexible exchange rate will help State Bank of Pakistan to better reach its reserves objectives.

Currently the rupee is traded at Rs98.725 to a dollar while for the fiscal year 2014-15 the government has expected marginal depreciation of the rupee against the US dollar. The IMF’s report on third review of Pakistan’s economy suggests that the IMF values Pakistan’s rupee at Rs113.7 to a dollar.

Commenting on IMF’s projection Dr Ashfaque Hasan Khan, a renowned economist and member of government’s Economic Advisory Council (EAC) said the forecasts of balance of payments and imports and exports are based on Rs113.7 to a dollar exchange rate and if this rate is not materialized, the Fund’s all projections would go wrong.

During the last fiscal year, the IMF had claimed that Pakistan’s rupee was overvalued and worked out its value at around Rs114 to a dollar. After initial depreciation, the State Bank of Pakistan (SBP) and Ministry of Finance managed to bring down the parity to around Rs98 to a dollar. The average exchange rate during the last fiscal year remained at Rs102.8 to a dollar.

According to analysts, a strong rupee may dent the government’s export target of $26.9 billion but it will help contain inflation.

They added the rupee depreciation will increase the prices of oil and electricity, which the government may not afford at a time when it has failed to ensure power supplies despite massively increasing tariffs.

In its report released this month, the IMF staff noted that greater willingness on part of Pakistan to accommodate downward exchange rate flexibility could play an important role in accelerated reserves accumulation, while helping boost exports over time.

The report stated that although recent grants of $1.5 billion from Saudi Arabia and the successful $2 billion Eurobond issue have eased foreign exchange market pressures and have begun to alleviate balance of payments crisis concerns, the IMF staff suggested that the SBP should not place its bets on one-off inflows.

In addition, it further advised that the central bank should align monetary and exchange rate policy to further boost reserves.

The country’s total foreign currency reserves slightly dipped to $14.45 billion including $9.398 billion held by the SBP.

The report also said that while the SBP agreed with IMF that one of the major challenges faced by the economy is to build foreign exchange reserves, the central bank differed with its assessment of an overvalued rupee.

The IMF said the SBP understood that higher interest rates could help attract private inflows to finance the current account deficit, but believes that currently the current account deficit was low and the main deterrent to private inflows was not the interest rate.

“(Pakistani) authorities do not share IMF staff’s view that the exchange rate is somewhat overvalued, and place greater priority on the nominal exchange rate stability”, said the IMF.

Published in The Express Tribune, July 25th, 2014.



Irfan | 9 years ago | Reply

I disagree with IMF . It seems like IMF is disappointed with the appreciation of Pakistani Rupee and creating Panic , so people start buying dollar in the hope price will go up.

Long term sentiments are good , Pakistan is plannin to lauch Islmic Dollar Bond ( $ 1 Billion Dollar ) to improve reserve further and Dollar will depreciate further.

To improve investments , SBP refuse IMF request to increase discount rate , which had positive impact on Investors.

santal | 9 years ago | Reply

a group who giving much publicity anti government and agent of agencies his things not believable

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