• Dollar rises Rs19 to record high of Rs285.09
• Some observers attribute decline to ‘large defence payment’; others say devaluation ‘intentional’ in line with IMF demand
• Country’s international bonds fall over three cents on the dollar

KARACHI: The rupee plummeted 6.6 per cent to an all-time low of Rs285.09 to the dollar on Thursday after its second major drop this year, as the country struggled to resume a stalled IMF loan programme.

Earlier, in late January, the rupee fell 9.6pc against the dollar — the biggest one-day drop in over two decades — after forex companies removed a cap on the exchange rate.

In absolute terms, Thursday’s decline in the rupee’s value was around Rs19.

The local currency, which has shed 20pc of its value against the dollar since the start of the year, has been sliding as the government has been trying to convince the International Monetary Fund (IMF) for over a month to release critical funding, which is necessary to unlock other bilateral and multilateral external financing.

“A delay in IMF funding is creating uncertainty in the currency market,” Mohammed Sohail, CEO of the brokerage house Topline Securities, said, according to Reuters, which also reported that the country’s international bonds fell by more than three cents on the dollar.

Foreign exchange reserves held by the State Bank of Pakistan have also shrunk in recent months to levels barely enough to cover three weeks of imports, though they jumped $556 million to $3.81 billion in the outgoing week.

A move to a market-based currency exchange rate regime is among the actions the IMF wants Pakistan to complete to clear its ninth review. If approved by its board, that would release a funding tranche of over $1 billion that has been delayed since late last year over a policy framework.

The fiscal adjustments demanded by any deal are likely to add to record-high inflation, which hit 31.6pc year-on-year in February, analysts say.

However, apart from the delay in the IMF instalment, some bankers saw other reasons for a sudden decline

in the rupee’s value. “The State Bank has been buying [dollars] for a large payment. The payment was related to import goods for defence purposes,” Atif Ahmed, a currency dealer in the interbank market, said, adding that the payment was about $300 million and its impact was visible from Wednesday, when the rupee dropped by Rs4.61 to the dollar.

However, he said the market was still determining whether the State Bank succeeded in buying $300m or would buy more on Friday.

He said exporters disappeared from the market as they stopped selling dollars from Wednesday. It caused a sudden shortage of dollars in the market while rates kept increasing. “The tom (tomorrow’s) value of the dollar for Friday was Rs287,” he said.

While bankers, currency dealers, importers and exporters agree that IMF was being high-handed, they have also blamed the government for the current situation.

“What we saw [on Thursday] was intentional devaluation,” said Faisal Mamsa, CEO of Tresmark. “It seems that the IMF has asked for a certain level for the rupee. Previously, the rupee made a low of 278.50 but clawed back to just below 260 as the SBP had restricted imports and the IMF was not pleased with that trend.

He saw the rupee stabilise in the range of 275 to 280 in the next few weeks, as a massive 300-basis-point increase in interest rate would start to make its impact felt on the rupee’s strength.

Currency dealers, who have been accusing Afghanistan of smuggling dollars from Pakistan and destabilising the exchange rate, said the IMF had forced Pakistan to bring the exchange rate on a par with the Kabul rate.

“The IMF has demanded to bring the dollar rate to the Pakistan-Afghan border rate, which was close to the Kabul rate. It was Rs290 on Wednesday and now it is Rs300 on Thursday,” said Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan.

He said banks and some investors were also involved in this price hike of Rs19 per dollar. He said both would sell out to book profits.

Published in Dawn, March 3rd, 2023