KARACHI, Nov 7: The IMF has responded positively to government’s move towards one exchange rate, a task made less difficult by the virtual disappearance of the margins between inter-bank and kerb rate.

Sources said that one exchange rate would be part of the PRGF programme, awaiting approval by the Fund’s board on December 5.

Although one exchange rate is the goal of IMF economic paradigm, the Fund has not been very enthusiastic in the past when sounded by the officials about the mergers of inter-bank and kerb markets. Informal discussions with IMF’s Monetary and Exchange Department in August last year indicated that the Fund would not discourage any such proposal but would like Pakistan to move cautiously.

The sources here said the issue was taken up by the Pakistan team in their discussions recently with the IMF on PRFG. The merger of the two forex markets is a key eventual goal set in the letter of intent that Pakistan normally submits to the IMF to get funding facility approvals.

The inclusion of one exchange rate agenda on PRGF may help prioritize the issue on which substantial work has been done by the finance ministry and the State Bank. An SBP task force is now busy formulating laws and procedures for setting up operation of exchange companies under the amended provisions of the company law.

Sources in Islamabad said that the amendment in the company law was necessary to empower the State Bank to regulate exchange companies because foreign exchange is involved. All public and private companies are now controlled by the Securities and Exchange Commission of Pakistan.

Independent currency experts, who look at Hawala business as the most damaging structural problem in Pakistan’s economy, feel that “with a sense of fear among money changers and low premiums, this is the time to merge the two markets. “The one issue that is critical to prioritize, is without doubt foreign exchange.

It is estimated that unregulated money changers cause an annual drainage of $7-8 billion. Even, if half of this amount is realized through official channel, the deficit in current account would be turned into a surplus, allowing the country to exit from debt trap and the IMF programmes. It will also provide real comfort to foreign investors.

Even in the changed scenario, the perception lingers on that the medium-term PRGF will keep the economy at the precipice of default, only to be avoided by piecemeal concessions by IFIs and bilateral donors. During the last fiscal, foreign debts have increased to 55.5 per cent of the GDP as IMF wants Islamabad to reduce domestic debts and opt for foreign debts.

Sources here said that interim steps like debt rescheduling and balance of payments support from the IFIs are short-term measures that are not tackling the structural imbalances.

The government is moving cautiously and at it’s own pace towards the merger of the two markets. The State Bank governor Dr Ishrat Husain, however, wants things to move faster on exchange companies, which were originally planned to start operations from July 2002.

If the merger of the inter-bank and kerb market is seen as a key issue of structural adjustment in the three-year PRGF programme, sources said it could be tied up with other performance criteria like forex reserve build-up, exchange rate management and further relaxations in the inter-bank market.

The inclusion of one exchange rate on the IMF programme coincides with a number of positive development on the global scene that have made rupee strong and kerb premium abnormally low.

As dollar suffered internationally, there was a mild appreciation of the rupee. With international investigations focusing on Hawala business specially in Dubai, the kerb market witnessed panic selling. The recent decision of the UAE central bank to enforce documentation on outgoing transfers has dampened money changer business.

By its strategic nature, the war against terror is a long term endeavour and so is the intended campaign against money laundering. As a result, the reverse capital flight has been set in motion. Foreign missions and relief agencies are selling dollars in the kerb market. There is selling pressure on foreign currency accounts. Anecdotal evidence supports the view that transaction volumes have fallen in the kerb market. Commercial bankers claim that the shortfall in premium has been successful in shifting workers in Dubai to use banking channels from early October. And the strengthening of the rupee has brought a virtual halt in dollarization. A stronger rupee would also reduce the burden on foreign debt servicing and help cut fiscal deficit.

The stronger rupee is not explained by improved economic fundamentals, yet the exogenous factors are unlikely to disappear in the short-term. The United States has reduced the interest rate to 2 per cent, indicating no respite in a deepening recession, which by its nature would be a prolonged one. Since US is taking the worst hit from this cyclic recession, the dollar would continue to weaken.

In the current scenario, “the most critical problem of Pakistan economy that needs immediate attention is foreign exchange and it is critical to prioritize the issue,” says a currency expert.