IMF Recommends Devaluing Rupee and Increasing Interest Rate

The International Monetary Fund (IMF) has termed Pakistan’s current interest rate of 8.5 percent as insufficient, suggesting to raise it to double digits to fill in the gaping current account deficit.

The IMF suggested depreciating the currency by at least 15 percent in the Fiscal Year 2018-19. The organization deems it incumbent to stabilize the presently staggering economy.

While the State Bank is of the view that the value of money should not weaken by more than 22 percent (current value), the IMF assessed it should be devalued by 30 percent.

The suggestions have come in the staff-level talks, presided over by the IMF’s mission chief for Pakistan, Herald Finger, where IMF considered the recent fiscal and monetary adjustments insufficient.

The organization expressed concern that the authorities seemed quite satisfied and they were not taking dire steps to tackle the macroeconomic imbalances that can risk the state’s economic viability.

Reportedly, the government and IMF are having differences on issues ranging from the extent of higher interest rate, depreciation of the rupee, and the recent budget’s fiscal impacts.

As mentioned earlier, the IMF suggested a rise in the interest rate, to 11 percent. It deemed it inevitable to contain inflation and minimize the deficit.

Another point of difference that arose in staff-level talks was the exchange rate parity. The IMF suggested the exchange rate of Rs. 145 to a dollar. However, the government deemed Rs. 137 to a dollar till June 2019 sufficient to deal with the challenges.

Also, IMF projects the budget deficit at 5.5 percent of the GDP while the government had targeted it at almost half a percentage point lower than that.

It needs to be mentioned here that the recommendations of IMF are not mandatory on Pakistan to follow. However, if Pakistan requests the IMF’s bailout, which the government has alluded to do, another mini-budget has to be in the pipeline.

The weakening of currency and raising the interest to double-digits will also become necessary.

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It should be noted further that the turmoil in the country’s markets and rising oil prices have increased the pressure on the State Bank of Pakistan to depreciate the rupee for the fifth time this year.

According to the analysts, the recent hike in policy interest rates by 275 basis points to 8.5 percent will not prove sufficient to turn around the continuous depreciation of money. This increase already is the highest in Asia so far.

Via: Tribune

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