Pakistan's currency tumbled to a record low of Rs 255.43 against the dollar, as the country battles a shortage of foreign exchange reserves and a food crisis. The authorities hope that the decline in the rupee will win approval from the International Monetary Fund for much-needed financial aid.
Pakistan, it seems, is freefalling. As the Shehbaz Sharif-led country grapples with skyrocketing food prices and hours-long blackouts, the nation’s currency tumbled to a record low on Thursday.
Pakistan’s rupee plummeted to a record low of Rs 255.43 against the dollar in the interbank market on Thursday — a slip of 9.61 per cent, the biggest one-day drop in over two decades. It was the largest single-day decline in both absolute and percentage terms since the introduction of the new exchange rate system in 1999, Ismail Iqbal Securities’ Head of Research Fahad Rauf was quoted as saying by Dawn newspaper.But what exactly is happening in Pakistan? What led to such a slide of the Pakistan rupee? What comes next for the crisis-hit nation? We try to give you the answers.
The currency slide
The historic rupee slide comes a day after foreign exchange companies removed its cap on the exchange rate, in order to avail much-needed loans from the International Monetary Fund (IMF) to rescue the crisis-stricken economy.
When the country was struggling economically back in 2019, then Pakistan prime minister Imran Khan had brokered a multi-billion dollar package from the IMF. However, the package remained in limbo, as Islamabad failed to follow market-based exchange rate.
Now, as the country’s economic crisis worsens and the country’s foreign reserves is dangerously low — it has only enough to pay for around three weeks of imports —the authorities withdrew the cap on the exchange rate and officials said it would continue to let the currency drop slowly in the open market.
Naveed Vakil, chief operating officer at AKD Securities Pvt Ltd in Karachi, was quoted as telling Bloomberg, “Pakistan is showing willingness and finally conceding to IMF demands to secure funds after a long period of reluctance. The IMF is firmly positioned on Pakistan maintaining a market-based exchange rate and today’s move has given markets the confidence that officials will now complete the remaining required conditions to continue the IMF program.”
The decision had a positive effect on the stock market, with the Pakistan Stock Exchange (PSX) rising by 1,200 points and finally settling by gaining 1,061 points at the end of the trading day.
Pakistan’s dire economy
The country’s economy has been in crisis and the situation has come to a head in the last few months. According to the State Bank of Pakistan, the foreign exchange reserves has hit a new nine-year low of $3.678 billion during the week ended on 20 January.
The drastic drop in the foreign exchange reserves has led to shipping containers full of imports, containing raw material for industries, food items and medical equipment, piling up at Pakistani ports, as buyers are unable to secure the dollars to pay.
The South Asian nation’s inflation has skyrocketed to levels never seen before, and severe food and energy shortages have left over 200 million citizens in huge distress. An Hindustan Times report pegged the country’s inflation at an eyewatering 28.7 per cent for food and non-food items.
Onions, a staple in food, were 501 per cent costlier than last year and rice, wheat, pulses, and salt are 50 per cent more costly over the same period. Shortage of wheat flour has also been reported from the country owing to which prices of the food item soared to as high as Rs 3,100 for a 20-kg bag.
The World Food Programme reported that the number of people experiencing food insecurity is projected to increase to 8.5 million from 6 million between September and December.Besides soaring prices of food items, the country has also seen an acute power shortage — with Pakistan reporting a massive blackoutlast Monday. Businesses and hospitals remained shut, causing untold misery and economic losses that could have run into billions.
Such has been the situation in Pakistan that the government earlier this month had ordered shopping malls, markets and wedding halls to close by 8:30 pm for energy conservation purposes.What comes next for Pakistan
As the people of Pakistan struggle on a daily basis for food and energy, there seems to be hope arriving in the form of the IMF.
On Friday, it was reported that an IMF mission would travel to Pakistan later this month to discuss the ninth review of the nation’s ongoing funding program, which it has stalled. “At the request of the authorities, an in-person Fund mission is scheduled to visit Islamabad 31 January–9 February to continue the discussions under the ninth EFF review,” Esther Perez Ruiz, the lender’s resident representative, said in a message to Reuters.
Ruiz added the mission will focus on policies aimed at restoring domestic and external sustainability, including to strengthen the fiscal position while supporting those affected by the floods, as well as power sector reforms.
Pakistan had secured a $6 billion IMF bailout in 2019, which was topped up with another $1 billion last year. There are fears that Pakistan could go the Sri Lanka way, and hence, the IMF’s aid is of crucial importance to Islamabad.
For the uninitiated, the IMF, also called the world’s “financial crisis firefighter,” was founded in 1944 and has gained prominence for providing financial support to countries hit by crises to create breathing room. The money the IMF loans comes from member countries, mainly through their payment of quotas. Multilateral and bilateral arrangements can supplement quota funds and plays a critical role in the IMF’s support for member countries in times of crisis.
It will be worth watching what happens next in the South Asian country at a time when it is not only facing an economic crisis, exacerbated by the terrible floods last year, but also the political instability owing to the rivalry between former premier Imran Khan and the current government.