Pakistan pledges flexible exchange rate, deeper forex market to IMF

KARACHI: Pakistan’s government assured the International Monetary Fund that it is committed to maintaining a flexible exchange rate and a transparent interbank market to support external sector rebalancing and reserve building.

It also plans to advance policies to encourage a deeper forex market, which will aid the nation's ability to attract private capital consistently.

The government assurance came as the IMF mission is anticipated to visit the country this month to discuss a new, larger, and longer programme, and this is ahead of the government starting to draft the annual budget for the next fiscal year.

“We are committed to ensuring a flexible exchange rate, both to support external rebalancing and as a buffer for shocks, and we intend to advance policies to promote a deeper FX market, which would help Pakistan attract private inflows on a sustained basis,” the government said in a letter of intent attached to the IMF’s staff report following the second and final review under the stand-by arrangement.

“Given that limited reserve buffers remain our main constraint in entrenching external stability, we will continue to rebuild foreign reserves, with FX sales limited to episodes of disorderly market conditions and not used to prevent a trend depreciation of the rupee driven by fundamentals,” it added.

In a report, the IMF stated that the FX market has demonstrated more normalised operation as a result of SBP attempts to improve pricing transparency in the open market. It applauded the initiatives taken to modernize the FX market environment including the removal of the exchange restriction and the remaining multiple currency practices (MCP).

“Staff recommended continuing to proactively build reserves via interbank purchases, and positively noted that the reduction of the SBP’s swap/forward position aided the decompression of forward premia,” it said.

“However, the recent stability of the rupee should not lead to renewed expectations that this will persist in the future,” it added.

“In this regard, banks should be free to transact in the interbank FX market without any constraints, which together with the SBP’s efforts to improve its functioning, would help build a deeper FX market that can serve as a buffer for shocks.”

Currency pressures have subsided, according to analysts, as the management of the fiscal and current accounts has kept FX markets—which include interbank, open, and grey markets—trading consistently in the 2 to 3 percent range. Additionally, because of this stability, funds have been diverted into regulated markets, which have helped debt and equity instruments.

“Stability has characterized the foreign account landscape in recent months, with measures to control demand, fiscal policies, and current accounts effectively managed,” said Chase Securities in a recent note.

“The implementation of the IMF programme has notably bolstered reserves, with the latest tranche elevating FX reserves to $9.1 billion, comfortably within the SBP target range of $9 billion to $10 billion by June 2024,” it said.

Remittances surged to $2.8 billion in April, marking a remarkable 28 percent increase year-on-year, second only to the previous month's $2.9 billion. “The Ramadan and Eid season likely contributed to this spike. Such robust remittance figures bode well for maintaining a balanced Current Account,” it added.