ISLAMABAD, Pakistan - The Pakistan rupee was in turmoil Tuesday as the currency plummeted 11%.
The sharp drop came after the government of Imran Khan announced it was seeking emergency bailout loans from the International Monetary Fund.
The Pakistani rupee fell to 138 to the dollar at one point, compared to its closing level of 124.3 on Monday.
Pakistan is sending a delegation to meet with IMF officials in Indonesia this week. The IMF is in Bali, Indonesia for its annual meetings with the World Bank.
At a press conference on Tuesday in Indonesia, IMF officials, who were releasing the latest World Economic Outlook update, were asked about the Pakistan government's announcement that it will seek an emergency bailout from the Fund.
"As far as I know, we have read the news stories too. We have not been formally approached yet. As with any member in good standing, they are certainly entitled to request financial support from the Fund. So, we will be listening very, very attentively when and if they come to us," Maurice Obstfeld, Economic Counsellor and Director of the Research Department of the IMF said.
"Pakistan is suffering from a number of imbalances: A very large fiscal imbalance. A large current account imbalance. They also have a low level of reserves and a currency that is too rigid and overvalued. As a result, they are having financing gaps. I assume that is what they will want to talk to us about," the IMF official said.
"Their government has expressed a desire to enact deep structural reforms that might break the cycle of Pakistan needing financial support from the Fund. Frequently, they have had programs in the past several times. And, you know, that is a very good sign going forward."
Rumours that the depreciation of the Pakistan currency on Tuesday was a formal government devaluation were put to rest by the State Bank of Pakistan.
"Although the current account deficit narrowed in August 2018, a consistent increase in the oil import bill on account of rising international oil prices has exerted pressure in the foreign exchange market," the central bank said in a statement on Tuesday.
"The State Bank of Pakistan is of the view that this adjustment in the exchange rate along with lagged impact of recent hikes in the policy rate and other policy measures to contain imports will correct the imbalances in the external account."
"The bank will continue to closely monitor the situation and stand ready to intervene in case of any unwarranted volatility in the foreign exchange market," the Pakistan central bank statement on Tuesday said.
The IMF has had officers on the ground in Pakistan and its review of the situation is pessimistic.
The international 189-member nation body said Pakistan faces significant challenges. Its foreign exchange reserves are low, it has high fiscal and current account deficits, and the growth in the economy is in decline.
Three key points have emerged from the IMF visit, which took place over the course of a week, and concluded on 4 October 2018. They were:
- Pakistan is facing significant economic challenges, with declining growth, high fiscal and current account deficits, and low levels of international reserves.
- Recent policy measures are steps in the right direction, but not yet sufficient. Decisive policy action and significant external financing will be needed to stabilize the economy.
- Once stabilization is beginning to take hold, increasing focus is warranted on critical reforms to foster sustained and inclusive growth and strengthen institutions.
“Pakistan is facing an increasingly difficult economic situation, with high fiscal and current account deficits, and low international reserves. This mostly reflects the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy. The fast rise in international oil prices, normalization of US monetary policy, and tightening financial conditions for emerging markets are adding to this difficult picture. In this environment, economic growth will likely slow significantly, and inflation will rise," IMF official Harald Finger, who headed up the Pakistan site visit, said.
“The team welcomes the policy measures implemented since last December. These include 18% cumulative depreciation of the rupee, interest rate increases of cumulatively 275 basis points, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps that go in the right direction."
“Additional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near term. Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs. Together, these steps would help reduce current account pressures and improve debt sustainability. Importantly, to protect the more vulnerable segments of society, there is a need to further strengthen social protection through the Benazir Income Support Program. These policies will help stabilize the economy and lay the foundations for sustainable and inclusive growth," the IMF official said.
“Once stabilization is beginning to take hold, the focus should increasingly shift to reforms to foster sustained and inclusive growth and strengthen key institutions. Priority areas include modernizing the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the SBP’s autonomy, intensifying AML/CFT efforts, improving the business climate and anti-corruption efforts, and fostering the economic inclusion of the poor, youth, and women," said Finger.
The IMF team, Finger said, met with the Pakistan Minister of Finance, Revenue and Economic Affairs Asad Umar; Minister of Planning Khusro Bakhtiar, Advisor to the Prime Minister for Commerce Abdul Razak Dawood, Advisor to the Prime Minister for Institutional Reforms and Austerity Ishrat Hussain, SBP Governor Tariq Bajwa, Finance Secretary Arif Ahmed Khan, FBR Chairman Mohammad Jehanzeb Khan, other senior officials, and representatives of the private sector and development partners.