The dollar closed at its highest ever rate of Rs133.6 on Tuesday after another round of the rupee’s depreciation as news broke of Pakistan seeking an IMF bailout.
The dollar surged by Rs9.26 and was traded at Rs133.6 at the close of the interbank market. This was the biggest single day jump in the dollar rate this year.
Its interbank rate at the close of market was up Rs9.26 or 7.4% from the previous day’s tally of Rs124.33.
On Monday, Prime Minister Imran Khan gave a green signal to his finance team for an IMF programme when they meet representatives of the Washington-based lender in Bali later this week. The loan will save Pakistan from defaulting on foreign payments. However, it comes with its own set of restrictions.
One of the conditions is a free float exchange rate as opposed to a managed exchange rate. This means that the central bank will not intervene in the market, and let market forces determine the actual rate of the US dollar against the Pakistani rupee. And this is precisely what seems to have happened.
The dollar surged to Rs133.6, up 7.4% from Monday’s rate of Rs124.3. This is because the central bank is not selling dollars in the market or asking other banks to do it, say market sources.
“Yes, there is an upward movement in the dollar and market expectations are driving it,” State Bank of Pakistan Chief Spokesperson Abid Qamar told SAMAA Digital.
The government decision to seek an IMF bailout package affected market expectations, Qamar said, adding that in such situations the dollar initially shoots up but settles at a lower rate by the day’s end.
The SBP spokesperson said that he could not quote any rate at the moment because there were more than 30 banks quoting different rates, and it was changing every minute. “We will know the actual rate and the high and low points when the market closes. All banks report their exchange rates to us,” he said.
The interbank market rate is the benchmark rate to evaluate the dollar’s value, according to experts.
It is the interbank rate that determines the open market rate, which is usually slightly above the former, but does not indicate the actual value of the dollar.
Pakistan is seeking the IMF loan programme because its monthly imports exceed its exports by $2.7 billion, which leaves it with fewer reserves than it needs to pay for essential imports (oil, raw materials, machinery etc), and to repay its foreign loans (more than $90 billion).
According to the latest data, the government has $8.4 billion in reserves, which is the lowest level of foreign exchange reserves in the last four years and is not enough to sustain even two months of imports. During the tenure of former finance minister Ishaq Dar, the government used these reserves to manage the exchange rate at Rs106. The policy was criticised by both international and local experts.
Once Dar stepped down, the Pakistani rupee experienced several episodes of depreciation against the US dollar. Since December 2017, the dollar has appreciated 18% but sources familiar with the matter say the IMF wants Pakistan to shift from a managed exchange rate regime to a free-float regime, allowing market sources to determine dollar value.
If Pakistan adjusts its exchange rate, experts believe that the dollar will shoot up to Rs140, and may even hit Rs150. However, others believe that it will settle at around Rs135.