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

The Pakistani rupee is expected to depreciate by another 20 per cent in the next three years under a free-float exchange rate mechanism agreed with the International Monetary Fund (IMF) for a $6 billion financial package last week, experts say.
The new market-based flexible exchange rate system will determine the real value of the rupee against the US dollar as the government agreed to change the managed exchange rate mechanism through the Monetary Policy Committee of the State Bank of Pakistan, the central bank.
The rupee will be stabilising at 180 (49 versus the dirham) to 200 against the greenback (54.5 versus the dirham) by 2022, under the free-float exchange rate system as the central bank will not intervene to support the currency, which lost about 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 dollar in the past two days from Wednesday's close of Rs141.39 to hit an all-time low of Rs149.35 in the inter-bank market and Rs150 in the open market on Friday. Its value dropped 3.62 per cent 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 SBP's chief spokesman said in an e-mailed 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 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. The SBP will announce its monetary policy on Monday.
"The IMF programme is not in the interest of Pakistan and its going to be very painful for the economy," said Dr Ashfaq Hassan Khan, member of the Economic Advisory Council, which is headed by Prime Minister Imran Khan.
Dr Khan, the principal and dean of the School of Social Sciences and Humanities at National University of Science and Technology, is the only member in the council who opposes the so-called IMF financial package. "The IMF programme will choke Pakistan's economy and restrict its GDP growth to 2 per cent to 2.5 per cent. It will increase unemployment, devalue the rupee and accelerate inflation," Dr Khan told Khaleej Times.
Analysts said the recent devaluation has added around Rs667 billion to Pakistan's external debt, and forex reserves also dwindled accordingly. During the week ending May 10, the 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 on May 10.
Gradual adjustment
Muzzammil Aslam, senior economist and former CEO of EFG-Hermes Pakistan, said a 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 the rupee's value was stable around 58 against the dollar and suddenly it corrected by 33 per cent in 2008 to converge its annual average of 5 per cent. Similarly, the exchange rate remained stable around 105 for five years [2014-18] and suddenly the US dollar jumped 30 per cent against the rupee in the last 12 months and again converges to long-term devaluation of 5 per cent," he said.
"Given the projections shared above, a 5 per cent adjustment in exchange rate is reasonable to save the country from any trade shock."
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 the consistent decline in the currency's value.
"Inflation will go up and prices of all essential items will increase and the common man will be in trouble. Our past experiences show that the devaluation of the rupee will not help boost exports of the country," he said. "The government is in a tough position and trying its best to overcome the situation. But it seems difficult to address the issues by this step."
Weak economic indicators
Vijay Valecha, chief market analyst at Century Financial, said Pakistan has undertaken a slew of financial steps, which include raising 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 the Pakistani rupee.
"The primary culprit being the weak external scenario of the 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," he said.
Moreover, Valecha said 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 added.
- muzaffarrizvi@khaleejtimes.com