Pakistan is likely to seek a waiver from the International Monetary Fund (IMF) for violating the condition of restricting the difference between inter-bank and open market currency rates as the lender improves its assumption for the average dollar price to Rs300.

Highly placed sources said that compared to July’s underlying assumption of Rs305.2 to a dollar, the IMF “is now assuming the average price of US currency at a little below Rs300 by June next year”.

They said that due to the breach of the condition of keeping the gap between currency rates at banks and foreign exchange companies at 1.25%, Pakistan would have to secure a waiver from the IMF board for qualifying for the next loan tranche. It is expected that Pakistani authorities will win the wavier as the global lender seems positive about gradual improvements in the currency exchange market.

Pakistan and the IMF have already concluded a staff-level agreement that will be followed by the board’s approval next month before the release of a $700 million tranche. Central bank spokesman Noor Ahmed did not reply to a question about the need for IMF waiver.

Under the $3 billion standby arrangement, the IMF had placed a condition to restrict the gap between inter-bank and open market exchange rates to just 1.25% aimed at ending Pakistan’s administrative control over the rupee. However, the gap at one point increased to as high as 8% before returning to the given range on the back of a crackdown by the authorities.

State Bank of Pakistan (SBP) Governor Jameel Ahmad said a few days ago that during the past couple of months, the central bank had cleared most of the backlog related to repatriation of profits and import payments on the back of better inflows and improved foreign exchange reserves.

However, the reserves still stand low at $7.4 billion and the government is required to increase them to $9.1 billion by June next year, according to the sources. The $9.1 billion level was agreed during the recent review talks, they said. The lender sees the exchange rate moving in the right direction but wants Pakistan to ensure complete return to the market-based exchange rate.

Sources said that the latest IMF assumptions suggested that the average exchange rate could be less than Rs300 to a dollar at the end of current fiscal year in June 2024.

This rate is lower than that used for the IMF’s July staff-level report. This marks a directional change as the lender has now further lowered the rupee value compared to its July assumption.

Neither the IMF gives the exchange rate explicitly nor is there any agreed rate between Pakistan and the lender. The underlying assumptions are used to work out the current account deficit, suggesting that the IMF has priced the dollar at an average rate below Rs300.

The government had prepared the budget for fiscal year 2023-24 at the exchange rate of Rs290 to a dollar. Any rate above Rs290 will have an impact on the defence budget, foreign debt servicing, cost of running Pakistani missions abroad and Public Sector Development Programme. During the recently concluded review talks, the sources said, the IMF revised upwards the cost of interest payments on foreign debt from Rs822 billion to Rs1.022 trillion, a huge slippage of Rs200 billion.

Read: Rupee surges to 2-week high amid IMF optimism

In the last staff-level report, the IMF did not state the exchange rate valuation in explicit terms again. Numbers have been worked out on the basis of backward working of current account deficit projections that show the rupee will keep losing its value under the IMF programme and beyond. Assumptions are subject to changes. Improvement in external inflows, higher exports and remittances can result in less depreciation of the rupee. One of the factors undermining exports is a constant rise in the cost of doing business due to higher taxes, transport costs, and electricity and gas tariffs.

The average exchange rate of close to Rs300 to a dollar by June 2024 means that the year-end rupee-dollar parity will be higher than this threshold.

Sources said that during the recently concluded talks the IMF projected the size of Pakistan’s economy at Rs105.9 trillion by June next year. This is lower than the July projection as it has cut Pakistan’s growth forecast to 2% for the current fiscal year.

In dollar terms, the IMF has assumed the size of the economy at $353 billion. It has also revised downwards the current account deficit projection to $5.7 billion for the current year, which is equal to 1.6% of gross domestic product (GDP).

After the IMF mission left Pakistan on November 15, the rupee has been constantly gaining ground against the dollar and closed at Rs285.2 to a dollar.

The IMF’s last staff-level report stated that misaligned economic policies – including large fiscal deficits, loose monetary policy and defending an overvalued exchange rate – had fueled consumption and short-term growth, steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves.

Pakistan has committed that in order to enhance transparency and efficiency in the foreign exchange market, it will publish daily inter-bank and open market exchange rates and develop a framework to monitor and publish developments and price in the informal market.

It will also accelerate work for transitioning to a new trading platform for spot transactions connecting all banks and make it operational by the end of December 2023.

Published in The Express Tribune, November 23^rd, 2023.

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