Rupee down by 4.61/dollar in inter-bank market over IMF deal delay

KARACHI: Rupee fell 1.73 percent or Rs4.61 against the dollar in the interbank market on Wednesday, as investors turned uneasy following the IMF’s demand to meet new conditions, including a market-based exchange rate to unlock the much-needed bailout loans.

The rupee ended at 266.11 per dollar, compared to Tuesday’s close of 261.50.

The rupee lost ground in the open market, tracking a decline in value in the interbank market. The currency dropped 7 rupees to settle at 274 versus the dollar from 267 in the previous session.

Pakistan is negotiating with the IMF to resume its $6.5 billion loan programme to avoid an impending default on repayment of its foreign debt. However, the government must cope with a situation where the IMF keeps moving the goalposts, despite that it has made difficult decisions packing a heavy political cost. 

The investors were worried by a delay in the IMF programme’s resumption, which has been stalled since November, and the rating downgrade by Moody’s Investors Service has added to the worry. Default risk on repayment of the nation’s foreign debt has peaked, according to Moody’s, and there are few prospects for improvement. 

“The currency remained under pressure amid Moody’s downgrade of the country’s rating to CAA3 coupled with the IMF requirement of the market-determined exchange rate before the staff level agreement,” said Tahir Abbas, the head of research at Arif Habib Limited. 

The agreement with the IMF is reportedly not expected to happen this week because there are still disagreements between the two parties over crucial issues, including the currency rate, interest rate, external funding gap and the Rs3.82/unit debt servicing levy on electricity.

Crisis-struck Pakistan is taking painful steps to secure a $1 billion loan from the IMF, including boosting taxes, eliminating blanket fuel subsidies and removing artificial exchange rate controls. Since the government lifted a cap on the currency later in January, the rupee has been determined by the supply and demand in the market. The rupee fell to record lows, but as supply improved, supported by exporters selling dollars, and as remittance inflows improved, it began to rise last month.

“It seems like the IMF is not pleased with the rupee getting stronger after making a low of 278.50, and so the intention is to devalue, with an immediate target of 275,” said Komal Mansoor, the head of research at Tresmark. The IMF continued to voice concerns that the government might be manipulating the currency. It sees the exchange rate close to the black market rate. The rupee was trading at 290 against the dollar in the grey market, said Zafar Paracha, Secretary General of the Exchange Companies Association of Pakistan.

“The importers are now purchasing dollars from the black market since the State Bank of Pakistan restricts the outflow of dollars and prevents importers from making bank purchases,” he said.