- What are the IMF’s conditions?
The rupee fell in the open market on Wednesday to new lows against the dollar, and was arrested only when an Exchange Companies Association of Pakistan delegation met the Prime Minister. The slide continued on Thursday, with the interbank rate hitting Rs148, before closing for the day at Rs 147.25. It seems that the market was not satisfied by the setting up of a two-man committee to control the situation in the kerb market, consisting of PM’s Finance Adviser Dr Hafeez Sheikh and new SBP Governor Ali Baqir. The ECAP delegation had explained to the PM that the fall of the rupee was because of speculative activity. This would be because it was thought that the value of the rupee agreed with the IMF had not yet been reached, and it would be profitable to hold dollars bought at a lower price, to sell when that figure was reached. To end the speculation, all the government had to do was announce that it had reached no figure with the IMF. That, for reasons best known to itself, it has failed to do. Instead, it has set up a high-powered committee to consider whether the present limit of $10,000 on cash that can be taken abroad, should be lowered to $3,000.
This is pursuant to the ECAP delegation’s complaint that cash foreign exchange was smuggled into the country through the Afghan transit trade. This was because Afghan traders were allowed to bring in cash and deposit it in banks here, at a time when there had been no bank branches. Now there were, so the permission served no purpose but to allow smuggling, or currency trade.
The government, in principle, should face a choice of exercising policy options to halt the crisis, or otherwise. However, now its hands are tied by its agreement with the IMF. Perhaps it should have been alerted at the time it was making the agreement that the IMF was particularly sensitive to how it managed its exchange rate, and a sticking point was its insistence that Pakistan switch to a free float. The present crisis, before that free float has been implemented, is a bad sign, and the government should take seriously the concerns the ECAP delegation expressed about what could happen to the rupee after the tough taxation measures expected from the coming Budget.