The International Monetary Fund (IMF) has classified Pakistan’s existing exchange rate as “stabilized arrangement”.
According to a local English daily, IMF has asked the government to move towards adopting a market-based flexible exchange rate with a strong, transparent and accountable central bank, as in other emerging markets of the world.
The PTI government is considering giving the State Bank of Pakistan (SBP) greater operation and institutional independence to comply with the IMF’s demands.
According to the official sources,
The State Bank Act would be amended to give the central bank more autonomy and clarify its objectives and functions. Specifically, the government, in consultation with the SBP and other stakeholders will finalize proposals to facilitate implementation of flexible inflation targeting as envisaged in the SBP Vision 2020.
The existing exchange rate arrangements and possible limits of the government borrowing from SBP would also be clarified, in line with prioritizing price stability as an objective of the monetary policy, they said.
In addition, SBP’s governance structure will be reviewed to enhance accountability in the SBP, while at the same time providing greater legal protection to the governor, deputy governors and the board of the SBP, added the sources.
With the adoption of a market-based flexible exchange rate, the IMF wants no intervention of the State Bank of Pakistan (SBP) into the market.
A mechanism would be developed, which would have the central bank bring its intervention into the currency market to zero by the end of every quarter.
“Nonetheless, it is not about what the IMF wants but it is about what is the best for Pakistan and saving the country from running into recurrent macroeconomic imbalances time and again,” said the official sources quoting the IMF staff team. The IMF discovered that consistent intervention of the central bank has eroded hard-earned macroeconomic stability and resulting in the evaporation of foreign currency reserves.
The currency market witnessed a slight depreciation of rupee against the dollar at the end of last week where rupee depreciated by 70 paise and crossed Rs. 140 against the US dollar in the market. It is expected that adjustments will continue in the coming weeks.
The Ministry of Finance’s spokesman has said that there was no target fixed with anyone on the exchange rate and the Rupee was at equilibrium, keeping in view SBP’s model on the real effective exchange rate.
With this, IMF has demanded that Pakistan should adopt a flexible exchange rate, and the State Bank of Pakistan will have to carefully manage the exchange rate to bring it in line with the real effective exchange rate (REER).
The report further mentioned the background discussions with the IMF and Pakistani officials. On the condition of anonymity, they said the IMF isn’t asking for something new regarding the exchange rate, they’ve been recommending this to Pakistan for years.