In talks with IMF, Pakistan agrees to depreciate rupee

[Hithchiker]

ISLAMABAD: Amid a policy decision on Friday to allow rupee depreciation, Pakistan and an International Monetary Fund (IMF) delegation concluded the first round of discussions on the country’s economy. Now members of the IMF delegation and Pakistan team are taking a two-day break to prepare for the policy-level wrap-up by Dec 13-14.

A senior official told Dawn that the State Bank of Pakistan (SBP) would now let the currency exchange rate to adjust to market conditions after many months, rather years, of resisting expectations. The timing of the move was planned for Friday to ensure materialisation of $2.5 billion worth of receipts from two international bonds launched last month.

This calculated move allowed the currency rate to touch Rs110 to a dollar on Friday before settling down at around Rs107 and did not go beyond official estimates. The two weekend holidays would give a breathing space instead of over-steaming the exchange rate.

Examine: Devaluation of rupee is not the answer if the root cause persists

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The sources said that the IMF had concerns over the health of Pakistan’s external sector, but the government authorities had different opinions. As the two sides concluded technical talks, the IMF team will prepare a report of its assessment over the weekend and share with Pakistan officials on Monday for the feedback and discussions.

While the government team, led by secretary of finance Shahid Mehmood will review the assessment, the IMF mission to Pakistan, led by Harald Finger, will visit Lahore next week for talks with provincial authorities including Chief Minister Shahbaz Sharif and independent observers and researchers from the business community and representatives of a private-sector university.

The authorities believed the currency adjustment would help shift foreign currency holdings from commercial banks currently standing at a higher level of around $6 billion back to official reserves and help divert remittances to official channels with declining gap among the official, banking and open market rates.

For the first time after many months, the central bank is reported to have noticed exporters to offload their positions. In the long run, the recent imposition or increase in the import duties and regulatory duties would make unnecessary imports expensive.

An official said that projections for CPEC-related repayments were within the range already discussed by the two sides in connection with debt sustainability analysis as $23 billion worth of projects were currently under various stages of implementation, including $17 billion in the energy sector by the private sector. About $6 billion worth of projects are in the road sector.

While a clean certificate of economic health from the IMF is useful for international financial institutions and investment sentiment, the two sides are reported to have noted that recent bond results were very positive for the fact that this was the first fund raising from international capital market without the IMF programme after many years and attracted favourable response and rates despite high twin deficits, showing confidence of international investors and good reflection of fundamentals.

The IMF director of Middle East and Central Asian Department (MCD), Jihad Azour, the former finance minister from Lebanon, will also join the final round of talks next week. While the Pakistani side will continue to be led by Mr Mehmood, a meeting of the IMF mission could also be arranged with Prime Minister Shahid Khaqan Abbasi who holds the portfolio of the finance minister, depending on the gaps in policy positions, a source said.

Pakistan would continue to remain under the IMF’s post-programme monitoring (PPM) until about 2023 for borrowing significantly higher than its quota. The threshold for Pakistan to move out of the PPM is estimated at 1.4 billion special drawing rights (SDRs) of the IMF that now stand around 4.3 SDRs.

Secretary Finance Shahid Mahmood, when contacted, said that the two sides held various rounds of technical discussions over the last week and covered a host of areas including macroeconomic situation, developments in energy, financial, monetary and social sectors. He said that he shared with the IMF delegation an overview of the economy which was on track and key economic indicators were moving in the positive direction. He said that significant growth had been achieved in revenue generation in the current fiscal year.

He said that Pakistan had achieved fiscal consolidation without compromising on expenditures on development and social protection and the government had set its eyes on achieving 6pc GDP growth which was inclusive, pro-poor and sustainable. Mr Mahmood said that the recent successful launch of Sukuk and Euro Bond were also discussed briefly.

Published in Dawn, December 9th, 2017
https://www.dawn.com/news/1375449/in-talks-with-imf-pakistan-agrees-to-depreciate-rupee

 

[Hithchiker]

Exchange rate depreciation
EditorialUpdated December 10, 2017

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ON Friday morning, the interbank market for foreign currency had a rude awakening as the rupee plunged against the dollar, and, just like last July, no attempts were made by the State Bank to shore up its value. Rumours filled the air as the rupee fell beyond 109 to a dollar, before stabilising at 107 by the close of trade.

“This movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market,” the central bank said in a press release issued only a couple of hours later, adding, “[t]he exchange rate will continue to reflect the demand and supply conditions”.

Also read: In talks with IMF, Pakistan agrees to depreciate rupee

It appears that the old days of central bank intervention to maintain an overvalued exchange rate are over.

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On Monday, we will see to what extent the State Bank’s resolve will hold, and how far the rupee has to go before it finds its true value “based on demand and supply of foreign exchange in the interbank market”.

Whatever happens in the days to come, we can only hope that there is a firm hand on the tiller as the economy enters choppy waters. But these hopes are hanging on a weak peg, because the State Bank’s acknowledgement of the exchange rate implications of the widening current account deficit now appears to be coming out of thin air. After all, only a fortnight ago in its November monetary policy statement (which now reads like a joke, incidentally), the State Bank was assuring us that all is well, that exports and remittances are ticking upwards, that the regulatory duties will sort out those pesky non-essential imports. And a mere 10 working days later the same State Bank is telling us that “the continuation of high growth in imports led to a widening of current account deficit, and consequently to depletion in the country’s foreign exchange reserves”, and, of course, an abrupt depreciation in the exchange rate.

Did the current account deficit widen in these 10 days alone? Did those who took exactly the same step back on July 5, only to be shouted down, have a point after all?

The decision to let the rupee find its own value was necessary. The dogged refusal of the former finance minister to even entertain the possibility was causing grave damage to the economy. But it is a little difficult to believe that the decision has been taken autonomously at the State Bank, and that the talks under way with the IMF for post-programme monitoring had nothing to do with it.

This is why it is so important for the State Bank to be led by a strong and independent governor, who is not afraid to use his voice to prevent embarrassments of this sort, where the central bank has to be led like a toddler to the dining table to eat his own words.

Published in Dawn, December 10th, 2017