The Pakistani rupee fell 9.6% against the dollar on Thursday, central bank data showed – the biggest one-day drop in more than two decades – in a slump that may prompt the International Monetary Fund to cut its loans to resume the country.
The drop comes a day after foreign exchange firms lifted a cap on the exchange rate, a key demand from the IMF as part of a program of economic reforms it agreed with the poor South Asian country.
The official value of the currency closed at 255.4 rupees against the dollar from 230.9 on Wednesday, the central bank said.
Faced with an acute balance of payments crisis, Pakistan is desperate for external financing, with less than three weeks of import coverage in its foreign exchange reserves, which fell $923 million to $3.68 billion, according to the latest data.
Pakistan secured a $6 billion IMF rescue package in 2019. Last year it was topped up with another $1 billion to help the country after devastating floods, but the IMF then suspended disbursements in November as Pakistan failed to make more progress with fiscal consolidation.
The lender announced on Thursday that it would send a mission to the country at the end of January to talk about resuming the program.
Aside from wanting the government to take fiscal measures, the IMF is pushing to move to a market-determined exchange rate regime, which the IMF emphasized in its Thursday statement.
The currency companies said on Wednesday they removed the cap in the country’s best interest, as it created “artificial” disruptions to the economy.
Wednesday’s action by foreign exchange traders, whose open market rates differ from those reported by the central bank, had a cascading effect on official exchange rates on Thursday.
According to JS Global, a Pakistani brokerage firm, the fall in the official share price was the largest since 1999 in both absolute and percentage terms.
In the open market, the rupee weakened from 243 rupees to the dollar to 262, down about 7%, after losing 1.2% the previous day, according to trading data from the Exchange Companies Association of Pakistan (ECAP).
“We have asked the central bank to raise the interbank (interest rate) to help fight the black market,” ECAP president Malik Bostan told Reuters.
The State Bank of Pakistan (SBP) and the Ministry of Finance did not respond to a request for comment from Reuters.
Attempts by Finance Minister Ishaq Dar to defend the rupee since his appointment in September, including reported foreign exchange interventions, have run counter to IMF advice.
However, the Pakistan stock exchange reacted positively to the fall of the rupee, with the KSE 100 index skyrocketing more than 1,000 points or 2.5%.
“The depreciation of the rupee removes some uncertainty about the future economic roadmap and the resumption of the IMF program, to which the market is reacting positively,” said Tahir Abbass, head of research at Arif Habib Limited.
Topline Securities, a Karachi-based brokerage firm, said the sharp drop in foreign exchange reserves from $8 billion in September to $4.6 billion on January 13 led to a widening spread between official and open market rates, creating a black market for dollars due to low supply.
The sudden drop in interest rates hit banks hard. According to two officials of commercial banks operating in Pakistan, banks that previously borrowed 230 rupees per dollar to make payments by taking open positions are now required to make payments at a rate of 250 rupees.
The officials told Reuters on condition of anonymity that the banks hardest hit were those that lacked sufficient dollar inflows.
While the move increases the chances of a restart of IMF financing, Pakistan is also reeling from decades of high inflation, which economists fear will now get worse. Most of Pakistan’s major imports, including fuel, are paid for in dollars.
“It will provide a major boost to the already heightened price pressures in the economy,” said Sakib Sherani, a Pakistani macroeconomist, adding that the consumer price index (CPI) is moving to levels previously unseen in the country.
In the first half of the current financial year, which ends in June, average inflation was 25%. The central bank is also tightening monetary policy sharply, with policy rates also at decades-high levels and growth has come to a standstill.
The ensuing economic crisis will also increase political pressure on the government, with former Prime Minister Imran Khan demanding an early general election.