Dollar jumps, reserves fall, and IMF calls as Dar’s folly comes back to bite

LAHORE: On a day of significant reckoning for Pakistan’s economy, the rate of the rupee fell sharply both on the interbank and on the open market going back to the same levels it was at before Ishaq Dar replaced Miftah Ismail as Finance Minister. 

Elsewhere in the federal capital, preparations went underway for the arrival of a team of the International Monetary Fund (IMF) that will visit Pakistan at the end of the month to discuss the fund’s 9th review. Meanwhile down south in Karachi, the State Bank of Pakistan’s dollar reserves fell by $923 million to merely $3.68 billion — making the arrival of the IMF team all the more important. 

While the incumbent finance minister was nowhere to be found, presumably mopping up the proverbial egg on his face, Pakistan is now placed at a very delicate juncture. While the public will rightfully have become sick and tired by now of hearing of another ‘delicate moment of national history’ every Monday and Thursday, the activity on a single day has opened a number of avenues that could lead to either default or Pakistan being saved by the bell. 

Whatever happens, the 26th of January has put a dark red line under Ishaq Dar’s fourth tenure as Pakistan’s finance minister. Taking the mantle from Miftah Ismail only four months ago, Dar had come in on the back of big promises to the party leadership that he could wrestle the dollar down to Rs 200 and set the PML-N up for an election victory. What he has done instead is see his legacy fall, throw his party under the electoral bus, and throw an economy that was gingerly making its way away from default off track and put it in serious danger. So what happened on this one significant day, and how will it play out in the immediate future? 

The IMF comes calling as reserves fall 

The day began with the sobering news that reserves held by the central bank dropped to a mere $3.7 billion — the lowest level they have been at since February 2014. Total liquid foreign reserves held by the country stood at $9.5 billion. Net foreign reserves held by commercial banks stood at $5.8 billion. Last week, foreign exchange reserves held by the SBP rose by $258 million to $4.6 billion. The immediate concern, of course, was that a large chunk of these reserves have been parked in Pakistan by friendly companies to save Pakistan from defaulting. 

It has also been reported that payments to Chinese commercial banks were made on the 24th of January causing the reserves to fall below the $4 billion mark. In the last 4 months Pakistan’s reserves have fallen by more than $5 billion dollars, endangering the country’s financial sustainability.

Former foreign minister Miftah Ismail, while talking to media, stated that Pakistan is now in the need of an IMF program more than ever and it seems that the current finance minister has now come to terms with this. Various experts believe that the State Bank’s move to let the dollar rate be decided by market forces today, will prove to be beneficial for Pakistan. 

The SBP’s free float move will hence, not only pave the way for the 9th review of the IMF’s Extended Fund Facility, but will also curb the black market for dollar exchange bringing reserves back to official channels, and hence the SBP.

But even with this bleak situation, there seemed a ray of hope with the announcement that the International Monetary Fund (IMF) team will visit Pakistan on January 31 to February 9, 2023 to continue the discussions under the ninth EFF review. “At the request of the authorities, an in-person Fund mission is scheduled to visit Islamabad January 31st – February 9th to continue the discussions under the ninth EFF review,” the IMF’s Representative in Pakistan, Esther Pérez Ruiz, tells Profit. 

The IMF team will be visiting at a time when the entire country is desperate to get the IMF deal as it teeters on the brink of default. While the country’s political leadership is at odds, both the government has expressed a desire to comply with IMF demands and former prime minister Imran Khan has also said that if he returns to power he will pursue talks with the IMF. 

Sources said that the government has assured the IMF in virtual meetings that it will promulgate an ordinance for the imposition of over Rs 200 billion new taxes to meet the revenue target of the current fiscal year.

She further said that the mission will focus on policies to restore domestic and external sustainability, including to strengthen the fiscal position with durable and high quality measures while supporting the vulnerable and those affected by the floods; restore the viability of the power sector and reverse the continued accumulation of circular debt; and reestablish the proper functioning of the FX market, allowing the exchange rate to clear the FX shortage. The IMF country representative maintained that stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that is vital for Pakistan’s sustainable development. It is pertinent to mention here that the IMF for the last few days was pressing Pakistan to impose over Rs200 billion new taxes besides market based exchange rate as well as increase in Energy Prices in order to resume the loan program.

The dollar breaks its shackles, this time for real

There was a bustling noise, all over Pakistan, as the market opened on Thursday. The dollar was quoted at 235 in the interbank exchange, and was being quoted at 247 in the open market at 10:30. This was a 4 rupee depreciation, compared to the rate at which the interbank trade closed on Wednesday. However, this depreciation was peanuts compared to the depreciation that was about to come. 

Within an hour, the dollar took another nosedive and was being quoted above 239, in the interbank trade. By this time the open market had taken its due course and started trading at 252. It is important to note that 252 is the same rate at which the Exchange Companies Association of Pakistan was trading on Wednesday before they brought it down to 243 after a meeting with the State Bank.

But that was also not all. Within 2 hours, the Pakistani Rupee touched its historically lowest level against the greenbacks. By the 1:30 mark, the rupee was being quoted at as much as Rs. 255/ USD in the interbank trade. Meanwhile the open market trades were then being recorded between 255 to 259. 

The market closed at Rs. 255.43/ USD as per the State Bank of Pakistan, whereas open market rate was as high as 263. 

While talking to Profit on Wednesday, Secretary ECAP Zafar Paracha said “We believe that the exchange companies rate should be above the 255 Rupee mark and we will get there gradually.”. However, the interbank movement within 3 hours has thrown away the gradual goals of the open market. There has been no response from the Secretary ECAP, vis a vis earlier statements, as of now.

Despite a 24 Rupee depreciation within a single day, there are little to no sellers of the USD in the market. Exchange companies are still citing unavailability of dollars as an excuse for not selling. 

Even though the experts claim that the real exchange rate is around 255, the people believe that the dollar rate is upwards of 270. These notions are appreciated by the black market traders, and a lack of communication by the State Bank, does not help either. Even in the interbank market, the volume traded is around $15 million at the day end.

However, it is widely believed that the depreciation of rupee is finally a good gesture that Pakistan direly needed. CEO topline Securities and PSX Analyst, Mohammad Sohail says that, “This valuation of rupee, based on market forces will help Pakistan’s falling exports and remittances through the banking channels and might also help with the 9th review”. He said that the bank rate was being kept in a narrow band from September onwards which gave rise to a black market, which is likely to go away after this step.

Fahad Rauf, the head of equity research at Ismail Iqbal Securities, stated that this is possibly the biggest single day depreciation of rupee since the 2000s. He stated that not having a “managed” rupee may not be huge, but the pressure on Pakistané’s external account would be eased, encouraging exporters and discouraging the black market.

Many believe that the move to make the immediate depreciation was led by the IMF review as Pakistan started virtual negotiations with the IMF on Wednesday. A more pertinent question would be what did Pakistan gain by keeping the exchange rate where it was earlier and how did Pakistan manage it?