IMF says rupee devaluation a welcome move for economic growth

KARACHI: The move by the State Bank of Pakistan (SBP) to allow market-based adjustment in the exchange rate appears a ‘welcome move’ as a flexible regime would help the country support exports and economic growth, the International Monetary Fund (IMF) said on Thursday.

IMF said the flexible exchange rate regime will help Pakistan strengthen economic resilience – a comment bearing up with the market’s argument that rupee’s recent freefall got an IMF’s push.

“Continued exchange rate flexibility will be important to facilitate external adjustment to support exports and economic growth,” Harald Finger, IMF Mission chief to Pakistan said in a statement after the Fund’s staff concluded its first post-program monitoring. “…the move by the State Bank of Pakistan to allow adjustment of the exchange rate in the recent days is welcome.”

An IMF staff mission, headed by Harald Finger, visited Islamabad during December 5 to 14 to discuss the post-program monitoring of Pakistani economy as part of $6.6 billion three-year extended fund facility arrangement that ended in September 2016.

Rupee, which has mostly traded in a tight range of 104-105 per dollar since December 2015, shed over five percent in the three consecutive sessions early this week as analysts said the central bank decided to let the currency find its equilibrium based on demand and supply. Currently, rupee is trading at around 110.

Analysts, however, said the Fund’s support to weak rupee indicates that the local currency’s downturn is not stopped as yet. They see a room for further depreciation as rupee is estimated to be overvalued more than 10 percent. Exporters find a respite in the rupee fall against the US dollar that would increase their earnings and help in revving up exports, teetering around seven percent of GDP.

Government is determined to inject new life into exports sector to support the balance of payment position by curtailing swelling current account deficit that reached to over five billion dollars in the first four months of the current fiscal year of 2017/18 from $2.3 billion in the corresponding period a year earlier. However, rupee depreciation also pushes up cost of debt repayments.

IMF staff further said the country’s growth momentum has continued to be favourable. “We expect GDP growth at 5.6 percent this year, supported by improved security conditions, energy supply, infrastructure investment and agriculture,” it said. “Maintaining this positive trend will require strengthening the economy’s resilience with greater exchange rate flexibility, fiscal discipline and an adequate tight monetary policy stance.”

Finger also acknowledged improvement in security situation in the country that encouraged “the mission to visit Pakistan and hold productive discussions in Islamabad for the first time in four years.” But, the staff said the country is facing important near-term economic challenges despite acceleration in economic growth and subdued inflation.

The IMF’s team said surging imports have led to a decline in international reserves despite higher external financing. The increase in the fiscal deficit last year, which reached to 5.8 percent of GDP due to provincial deficit and low revenue collection by the Federal Board of Revenue, has added to these trends.

IMF said intercompany arrears in the power sector continue to accumulate and need to be addressed decisively. “While the authorities have taken steps to address these challenges, greater efforts are required to prevent a further build-up of vulnerabilities and preserve Pakistan’s hard-won macroeconomic stability,” it said.

The Fund emphasised strong reform effort to maintain external stability, ensure debt sustainability and support higher and more inclusive growth in the medium term. “This includes pursuing medium-term fiscal consolidation driven by accelerated efforts to broaden the tax base, strengthening the monetary policy framework and autonomy of the SBP, eliminating the losses of public sector enterprises, improving the business climate and continued strengthening of the financial sector,” it said. “In parallel, continuing to strengthen mechanisms for protecting the most vulnerable will be critical to support inclusive growth.”