Pakistan has abandoned controls on its currency exchange rate as authorities attempt to revive an IMF bailout, sending the rupee to a record low as the crisis-hit economy risks collapse.
Pakistan’s central bank has in recent months enforced an unofficial exchange rate for money changers that kept the rupee artificially high, analysts say, creating a black market for currency.
But traders said authorities withdrew those curbs on Thursday in order to meet an IMF demand to liberalise the exchange rate. The official banking rate ended the day nearly 10 per cent lower at Rs255 to the dollar, the central bank said.
Pakistan’s economic crisis has worsened in recent days as the country’s foreign reserves run low.
Shipping containers full of imports are piling up at Pakistani ports, according to the country’s central bank, with buyers unable to secure the dollars to pay for them. Associations for airlines and foreign companies have warned they have been blocked from repatriating dollars by capital controls imposed to protect dwindling foreign reserves. Officials said factories such as textile manufacturers were closing or cutting hours to conserve energy and resources.
The difficulties were compounded by a nationwide blackout on Monday that lasted more than 12 hours.
“Already a lot of industries have closed down, and if those industries don’t restart soon, some of the losses will be permanent,” said Sakib Sherani, founder of Macro Economic Insights in Islamabad.
Analysts warn that Pakistan’s economic situation is becoming untenable, with the country at risk of following Sri Lanka, where a lack of foreign reserves triggered severe shortages of essential goods and eventually led to a default in May.
Islamabad’s foreign reserves have dropped to under $5bn, less than a full month of imports, and Prime Minister Shehbaz Sharif’s government remains in a deadlock with the IMF over resurrecting a $7bn assistance package that stalled last year.
The IMF suspended disbursements of the package in November and Pakistani officials say it made liberalising the rupee exchange rate a condition for unlocking its next lending tranche.
“Every day matters now. It’s simply not clear what the way out is,” said Abid Hasan, a former adviser to the World Bank. “Even if they get a billion [dollars] or two to roll over . . . things are so bad that it’s going to be just a Band-Aid at best.”
Ahsan Iqbal, Pakistan’s planning minister, told the Financial Times the country had “drastically” reduced imports in an attempt to conserve foreign currency. Analysts said this included restricting banks from opening letters of credit for importers, leading a steel industry body this week to threaten halting production.
The central bank on Monday said it was easing import restrictions to facilitate the supply of essential items such as food and fuel. Pakistan is still reeling from devastating floods last year that affected tens of millions of people and caused damage costing an estimated $30bn.
International lenders pledged more than $9bn to aid the country’s recovery at a donor conference in Geneva this month, but details about how and when that money will arrive are still being negotiated.
Sharif’s government has said it is committed to reviving the IMF deal to unlock the next tranche of funds. But the sides remain at an impasse over the IMF’s demand that Pakistan accepts economic reforms such as raising subsidised energy prices.
Pakistan argues that pushing through painful austerity measures while it is recovering from the floods is impractical. “If we just comply with the IMF conditionalities, as they want, there will be riots in the streets,” Iqbal said. “We need a staggered programme . . . The economy and society cannot absorb the shock or cost of a front-loaded programme.”
The economic turmoil comes as Pakistan prepares for elections that must be held this year. Sharif’s main challenger is Imran Khan, the former prime minister who was ousted last April but remains highly popular. Both leaders blame the other for the economic predicament, and Khan is attempting to force early polls.
“We need predictable power,” said Taimur Khan Jhagra, a leader from Khan’s Pakistan Tehreek-e-Insaf party, accusing Sharif’s government of mishandling the energy supply. “It dictates the quality of life.”