Pressure mounts on Dar to stop ‘managing’ exchange rate

Published January 8, 2023
<p>The International Monetary Fund, among others, has also set a pre-condition of single exchange rate for resuming talks, sources claim.—AFP/file</p>

The International Monetary Fund, among others, has also set a pre-condition of single exchange rate for resuming talks, sources claim.—AFP/file

KARACHI: As Pakistan’s foreign exchange reserves have fallen to an alarming level — not even sufficient enough to cover three weeks’ worth of imports — the financial sector has asked Finance Minister Ishaq Dar to stop ‘managing’ the rupee-dollar parity, which is one of the key conditions set by the International Monetary Fund (IMF) for resuming stalled talks for the release of a $1.12 billion tranche.

Prime Minister Shehbaz Sharif on Thursday announced that an IMF mission would come to Pakistan in two or three days.

Pressure is now mounting on the finance minister from stakeholders to stop efforts to get control over the exchange rate artificially as this policy has resulted in three types of exchange rates — interbank, open market and grey — that have practically been fuelling economic instability.

However, sources claimed that the finance minister is not ready to accept the single exchange rate market.

Sources said the IMF needs no physical visit to Pakistan since the pre-conditions for resuming talks are already on the table of the finance minister. The virtual or physical talks have no difference when the conditionalities are already known to both parties.

Experts and currency dealers also advised the finance minister recently to stop influencing the currency as it causes more instability than stability.

“If a single exchange rate is maintained, immediately the dollar prices will shoot up but the grey market will disappear as the reason for its existence will not be there,” said Atif Ahmed, an interbank currency dealer.

At the moment, getting dollars on interbank rates is extremely difficult since the State Bank of Pakistan (SBP) has a strong grip over the opening of letters of credit (LCs). The US dollars are available in the open market but not at the rate they announce daily.

“We met the finance minister and advised him to bring a single rate market but the minister did not agree,” said Zafar Paracha, Secretary General Exchange Com­panies Association of Pakistan (ECAP).

He also suggested allowing the exchange companies to clear blocked small LCs up to $50,000. “It will substantially reduce the burden on the government,” he said, adding that many imported goods are stuck at the port because of the non-opening of LCs for small amounts. If the exchange companies are allowed, up to 50 per cent of the load on the government will reduce.

However, some experts believe that the single market suggestion will cost heavily to this political government as well as the economy. The inflation will immediately surge as the dollar could immediately rise to Rs240-Rs245.

Mr Ahmed believes the country will have to pay the cost of a single exchange rate market as it will inflate the prices from top to bottom, but a chance to survive against the default is there.

Faisal Mamsa, CEO of Tresmark, expressed reservations about rupee depreciation: “Those blindly ready to follow the depreciation diktat may need to reevaluate its effectiveness when the rupee went down from 160 to 230. How much of the import demand was quashed? How did it impact our balance of payments and inflation?”

“While in theory, currency depreciation should boost exports, our decades of low investment, capacity constraints, poor infrastructure and a myriad of other issues, do not allow a sustainable rise in exports. So essentially the equation doesn’t change except for the fact that inflation turns red hot, and people feel the heat,” he said.

“But how things play out will not be known any time soon […] and till then no one wants you to catch the falling knives,” he said. “Consequently, market consensus is that PKR looks to weaken at a faster pace in the next few weeks and may slow down only if the outlook and sentiment on the foreign exchange reserves position get better,” he said.

Published in Dawn, January 8th, 2023

Now you can follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Expansionary budget
Updated 10 Jun, 2023

Expansionary budget

Fiscal plan that the budget has laid out will lead to the accumulation of more debt, even if the targets are met.
Politics by proxy
10 Jun, 2023

Politics by proxy

LIKE some grotesque phoenix, the Istehkam-i-Pakistan Party has risen from the still-smouldering ashes of the PTI....
Badakhshan bombing
10 Jun, 2023

Badakhshan bombing

THE gruesome tactic of attacking funerals is part and parcel of the militant playbook. Several funerals have been...
Stuck in the past
Updated 09 Jun, 2023

Stuck in the past

Dar's enduring fixation with the exchange rate suggests that he has learned nothing from past mistakes.
Unequivocal message
09 Jun, 2023

Unequivocal message

AN unmistakably forceful message has been sent out that puts to rest any notion of a house divided. The military top...
Early closure
09 Jun, 2023

Early closure

ON the face of it, closing shops early is a sound idea. Not only would the move help save energy during the stifling...