The International Monetary Fund’s (IMF) market-based exchange rate policy has kept the US dollar significantly overvalued against the Pakistani rupee, claims Tola Associates, a leading tax advisory and consultancy firm. In its recent Economy Alert note, the firm revealed that without IMF-imposed conditions, the rupee’s value would have averaged Rs. 211.5 to the dollar by the end of October 2023, rather than the current rate of Rs. 278.
Impact on Inflation and Interest Rates
According to Tola Associates, the overvalued rupee-dollar parity has had severe economic repercussions:
- Inflation Rate: The inflation rate for the July-October period, currently at 8.7%, could have been reversed into a deflation of 4.67% if the rupee had been valued at Rs. 211.5.
- Interest Rates: Lower inflation would have enabled the central bank to reduce interest rates to below 2%, providing much-needed relief to businesses and households.
- Debt Repayments: A 1% reduction in interest rates could save the government Rs. 475 billion in domestic debt repayments this fiscal year.
Potential Savings and Economic Growth
The advisory firm estimates that aligning the rupee with its real value could create fiscal space of Rs. 6.4 trillion, which could be redirected towards:
- Infrastructure development
- Social welfare programs
- Boosting economic growth
Ishaq Dar’s Stance on Exchange Rate
Former Finance Minister and current Deputy Prime Minister, Ishaq Dar, has also voiced his opposition to a free-floating exchange rate. He recently stated that based on economic fundamentals, the rupee’s value should not exceed Rs. 240 to the dollar.
Dar argues that the current exchange rate regime disproportionately affects the general public, increasing inflation and the external debt burden. He favors using the Real Effective Exchange Rate (REER) as a benchmark for determining the rupee’s value, which he believes should be between Rs. 235 and Rs. 240.
Central Bank’s Dollar Purchases
Critics of the current policy accuse the central bank of manipulating the exchange rate to buy dollars from the open market. In the last fiscal year, the central bank reportedly purchased over $6 billion, including $722 million in July alone. These purchases, critics argue, were made possible due to the artificially high rupee-dollar parity under IMF policies.
IMF’s Perspective
The IMF maintains that a market-based exchange rate is essential for:
- Rebuilding foreign exchange reserves
- Enhancing Pakistan’s competitiveness in international markets
- Serving as a shock absorber for economic fluctuations
At the approval of its $7 billion loan program, the IMF emphasized the importance of exchange rate flexibility as a tool for economic stability and growth.
The debate over Pakistan’s exchange rate policy highlights a critical economic challenge: balancing IMF-imposed conditions with the country’s domestic economic needs. While the IMF argues for a flexible exchange rate to stabilize the economy, experts like Tola Associates suggest that a recalibrated rupee value could unlock substantial economic benefits, reducing inflation, lowering interest rates, and easing the debt burden.
As Pakistan navigates these turbulent economic waters, the government faces a crucial decision: adhere to IMF conditions or pursue a stable exchange rate that aligns with the nation’s economic realities.
