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February 24, 2020
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IMF bailout: Rupee may depreciate further as Pakistan set to adopt flexible exchange rate

ISLAMABAD: The rupee may depreciate further against the dollar in coming days as Pakistani officials are hinting at adopting flexible exchange rate to secure an IMF bailout package.

A Federal Minister on Monday said Pakistan will adopt a more flexible exchange rate policy by moving away from a managed currency regime

“The government is willing to spend political capital for much needed structural reforms …..and it will adopt a flexible exchange rate regime,” said Federal Minister for Planning Khusro Bakhtyar on Monday.

Earlier, Finance Minister Asad Umar had said the timing and pace of adjustments on flexible exchange rate was a matter of difference between Pakistan and the IMF but now the differences had narrowed down.

Sources in the Ministry of Finance said that Pakistan has decided to implement a market-based flexible exchange rate.

The government feels that the alignment of exchange rate has already started producing intended results of correction in current account deficits during the past three months to only $356 million in February, the official added.

As part of negotiations for the 22nd bailout package, the IMF had demanded that Pakistan should adopt a free float exchange rate regime.  “The free float exchange rate is an ideal scenario but the problem is that Pakistan’s currency market is very thin and could be manipulated due to a complete free float,” said former finance minister Dr Hafiz A Pasha.

He favoured a managed floating exchange rate regime but it should be linked with Real Effective Exchange Rate. Dr Pasha said Pakistan’s real effective exchange rate regime is still positive by 3%, suggesting that the rupee can be further devalued by 3% to achieve the equilibrium. “The flexible exchange rate stops speculations and the free float leads to speculative activities,” he added.