Pakistan’s moves to loosen its hold on the currency and raise fuel prices indicate that the beleaguered nation is finally making the unpopular decisions needed to secure the International Monetary Fund’s $6.5 billion bailout program.
According to the exchange department of AKD Securities Ltd. the rupee fell to just 270 per dollar on Monday as authorities allowed the currency to become more market-determined, one of the IMF’s conditions for the loan. The government also raised petrol prices to record levels over the weekend ahead of the arrival of the IMF team on Tuesday for a loan review after months of delays on the next loan tranche.
Pakistan is sliding deeper into crisis amid a dollar shortage and rising inflation, forcing Prime Minister Shehbaz Sharif to urgently get money from the IMF. The country is in dire need of money as reserves fell to $3.7 billion, less than a month of import coverage.
“Pakistan has taken the IMF program seriously by making these decisions even though we are in an election year,” said Suleman Rafiq Maniya, chief advisory at Vector Securities Pvt. “Everything depends on the visit of the IMF team and their response. These measures are quite painful and entail huge political costs.”
Sharif has said his coalition government is determined to finalize the bailout after a delay in implementing key decisions, even if it means paying political costs just months before national elections. A tough task awaits the country’s economic managers, led by Finance Minister Ishaq Dar, who must convince the IMF that the country is ready to take other tough measures, including raising taxes and gas prices.
Frontier markets seeking IMF funding are under greater pressure to loosen their grip on currencies, which will help improve their current account balances. Egypt suffered its third devaluation in less than a year this month. According to calculations by Bloomberg Economics, the rupee should stabilize at 266 per dollar, according to a note Monday from Ankur Shukla, a Mumbai analyst.
In Pakistan, the rupee’s fall this month was driven by the decision of money exchange companies to remove the cap on the dollar-rupee exchange rate on the open market. The supply of dollars among onshore money changing companies dried up as locals turned to the black market as the dollar was sold at about 10% above advertised rates.
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