IMF loan package: Pakistan rupee likely to fall further against dirham

Pakistani rupee is expected to depreciate by another 20 per cent of its value in next three years under a free-float exchange rate mechanism agreed with the International Monetary Fund (IMF) for $6 billion financial package last week, experts say.

New market-based flexible exchange rate system will determine real value of the rupee against the US dollar as the government agreed to change managed exchange rate mechanism through Monetary Policy Committee of State Bank of Pakistan, the central bank.

The rupee will be stabilising at 180 against the US dollar (49 versus dirham) to 200 against the greenback (54.5 versus dirham) by 2022 under free-float exchange rate system as the central bank will not intervene to support the currency, which lost approximately 40 per cent of its value since December 2017.

Under the fresh round of depreciation, the rupee shed 5.62 per cent, or Rs7.96, of its value against the US dollar in past two days from Wednesday's close of Rs141.39 to hit all-time low of Rs149.35 in the inter-bank market and Rs150 in open market on Friday. It dropped 3.62 per cent of its value on Thursday.

The central bank's chief spokesman said this movement reflects demand and supply conditions in the foreign exchange market. "It will help in correcting market imbalances," the State Bank's chief spokesman said in an emailed statement.

Painful path

In its latest study - Pakistan's Economy: IMF Programme and its Implications, Topline Research said the government is expected to let the rupee depreciate 13 per cent to 17 per cent to Rs160-165 against the US dollar by December 2019.
The research house also said that the key interest rate may be raised by 1.25 percentage points to the peak of 12 per cent during the year. State Bank of Pakistan will announce Monetary Policy on Monday.

"The IMF programme is not in the interest of Pakistan and its going to be a very painful for the economy," said Dr Ashfaq Hassan Khan, a member of the Economic Advisory Council, which is headed by Prime Minister Imran Khan.

Dr Khan is the principal and dean of the School of Social Sciences and Humanities at National University of Science and Technology. He is the only member in the council who oppose the so-called IMF financial package.

"The IMF programme will choke Pakistan's economy and restrict its GDP growth to two per cent to 2.5 per cent. It will increase unemployment, devalue rupee, and accelerate inflation," Dr Khan told Khaleej Times.

Analysts said the recent devaluation has added up around Rs667 billion in Pakistan's external debt, and the forex reserves also dwindled accordingly.

During the week ending May 10, 2019, SBP's reserves decreased by $138 million to $8.84 billion due to external debt servicing and other official payments. Total foreign exchange reserves, which also includes $7.04 billion held by commercial banks, dropped to $15.89 billion.

Gradual adjustment

Muzzammil Aslam, senior economist and former CEO of EFG-Hermes Pakistan, said gradual adjustment in exchange rate system will be good for the economy.

"We have to improve productivity, growth and competitiveness for a strong currency," Aslam told Khaleej Times.

He said the rupee on an average depreciated four to five per cent against global basket of currencies in the last 30 years. Any attempt to keep rupee strong in the past has resulted into massive devaluations.

"We witnessed during 2003-07 when rupee value kept stable around 58 against the dollar and suddenly it corrected by 33 per cent in 2008 to converge its annual average of five per cent. Similarly, exchange rate kept stable around 105 for five years (2014-18) and suddenly the US dollar jumped 30 per cent against the rupee in last 12 months and again converges to long-term devaluation of five per cent," he said.

"Given the projections shared above, five per cent adjustment in exchange rate is reasonable to save country from any trade shock," he added.

Inflation to go up

Iqbal Dawood, president of the Pakistan Business Council, said it will be 'very tough' for Pakistanis to offset the impact of consistent decline in currency value.

"Inflation will go up and prices of all essential items will increase and common man will be in trouble. Our past experiences shows that devaluation of rupee will not help boost exports of the country," he said.

"The government is in tough position and trying its best to overcome the situation. But, it seems difficult to address the issues by this step," he added.

Weak economic indicators

Vijay Valecha, chief market analyst, Century Financial, said Pakistan has undertaken a slew of financial steps, which include raising of electricity and gas rates, depreciating the rupee by more than one-third and increasing the benchmark central bank interest rate by 450 basis points. However, none of these have been enough to prevent the relentless slide in Pakistani rupee.

"The primary culprit being the weak external scenario of Pakistani economy where merchandise exports have rose by a meagre 1.85 per cent to $15.1 billion in the July-September period. In contrast, imports for the same period stand at $36.6 billion resulting in a trade deficit of $21.5 billion," Valecha said.

Moreover, he said the inward home remittance is grossly inadequate to meet the humongous trade deficit and this exactly is the fundamental problem plaguing Pakistan.

"The only way Pakistan can come out of this abyss is by depreciating the rupee further so that exports are boosted and imports are contained. With the economy under duress, the path of least resistance for Pakistani rupee seems downward," he said.

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