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.
COMMENTS (17)
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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.
a group who giving much publicity anti government and agent of agencies his things not believable
IMF is no Shaikh Rasheed and cannot be asked to resign by PML N for speaking the truth
IMF calculations of exchange rate are based on assumption that a country is following a fully float exchange rate regime. In majority of emerging markets including India and China, IMF projections are much different than their contemporary rates due to managed exchange rate regimes. But the media morons are less in other economies who project such small discrepancies as their main headlines. I wish ET should teach a basic economic course to its reporters.
These projections are not the result of any great technical analysis of projected demand and supply of the PKR vs a vis the USDby the IMF. The IMF cannot project PKR rates in any more sophisticated a manner than market participants here in Pakistan. Rather, the IMF projections are simple and conservative assumptions based on historical depreciation rates only. The way this article has been written and the prominence it has been given in your newspaper, it could encourage needless speculation and sell-side pressure on the PKR.
This is a clear case of irresponsible journalism in the country as the IMF does not give out such numbers.
IMF compliance will lead to " Crash Pakistan. " We will bottom out with a declining income and stagnancy in economy. Violent political turmoil will not help our economic growth. High taxation rates, tax penalties, and tax compliance is hindering progress. We cannot afford depreciation as our infrastructure will weaken possibly not support rising population growth. The solution is to find lowering tax rate, waste as in corruption of public money, bringing down military expenditures @60% or lower. We need to bridge infrastructure development with public bond schemes with a reasonable living return. Also start a public retirement scheme for those in tax net by giving monetary benefit at retirement age 62 which will bring many in the tax net. Citizen will comply with a monetary return at age 62 retirement benefit. We can.
Previously steps were taken like that of oil payments which were being deferred , there was restriction on gold imports and some related steps. These steps were taken based on future expectations that economy size will grow and it will be easy to pay the taken debt back easily but they are wrong in this direction. As future expectation can go in any direction. Beside this if we look into last 4 decades Pakistan went through multiple regimes and number of governments this inconsistency also led to downfall of rupee which i am afraid we have set our standard to follow.
The focus is on exporting terror, mindless defence spending, internal disturbances and poor governance, so how can the country's economy grow in such unfavourable circumstances ?
Now let us see if PML(N) can prove IMF wrong and prove that PML(N) can handle economy better and keep the exchange rate to where it is now.
How's that for strategic assets.
Future? This already is the present, the exchange rate was around 108 when it was artificially brought down to around 99.
They cannot possibly sustain that level for long, and the depreciation in exchange rate this time will bring much worse consequences for the economy than if the exchange rate hadn't been manipulated.
I guess tribune is fast becoming a source of anti-government rhetoric from what it once used to be a source of more credible news. The editor and reporter should have taken the pain of understanding what is underlying assumption/method for IMF's "forecast" instead of the whole non-issue. The rupee parity used in IMF document is just a calculation number derived from GDP forecast on US and rupee which by no way shows IMF forecast of Rupee depreciation assumption. Exchange rate and interest rate are important and sensitive issues and IMF will never give its forecasts in its document. it is kind of hijacking SBP authority.
Sounds like a foreign conspiracy.
They don't care. Their money is in swiss accounts. Depreciation will only matter patriotic Pakistani who keep their wealth in Pakistan.
As long as Super Dar is in power the rupee will be defended fiercely. Doesn't matter if we have to throw all our borrowed billions. He will not let the rupee fall. That job will be left to the next government that comes in 2018. Like the last government and this current government the next government will begin it's job with another IMF bailout.
while the government plans 14th Aug celebrations. What more to reflect?