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Pakistan Reader# 541, 27 January 2023

The PKR woes: Implications of a depreciating currency



The market-based exchange rate will enable a successful review of IMF talks but the mid-term prospects still remain uncertain

Ankit Singh

On 25 January, among a slew of measures, the Pakistani currency, PKR was undone with an official cap on controlling the value of the currency with respect to the dollar and was allowed to float freely on a market-based exchange rate.

On 27 January, the PKR depreciated by 15 per cent of its initial value at PKR 230 per USD. The move by the government on a market-based exchange rate was speculation to complete IMF sourced extended fund facility review meeting by the end of January. The country has forex reserves to pay for under a month's worth of imports. It is worth discussing the implications of a market-based exchange rate currency mechanism.

1. Possible better remittances and elimination of the black market.
Before the cap was removed, there were three exchange rates operating in Pakistan. It had dried up all the dollars in the country as there were better returns in the black market on every dollar, similarly, the remittances were also being channelized through such means and the forex reserves were also reduced due to the diversion of USD from formal channels. The latest decision may bring relief to forex reserves and eliminate the black market of the exchange rate.

2. Reduction in imports amid stagnant exports.
The imports of essential commodities will become more difficult as the dollar will be dearer while the exports in fact being less costly may not perform up to the mark due to the erosion of business confidence in Pakistan. The greatest impact will be felt by energy imports, which amounted at USD 17.03 billion during the first ten months of the last fiscal year. The energy bill constituted about of 30 per cent of the net imports worth USD 80 billion. The government had earlier decided to cut this amount to 20 per cent of the import bill.

3. More inflation for the common man.
The energy bill will surge as a result and the burden will be shared by all energy-intensive sectors, the electricity bill is poised to increase along with transportation charges. This will push the wholesale price index to higher indices. On top of this, the recent hike in the policy rate by the State bank of Pakistan may dampen the objective of containing inflation, the country may in fact witness hyperinflation.

4. The notion of pride will be challenged.
Pakistani journalists have often reminded their audience of the proportional parity Pakistan wants to maintain vis-a-vis India. That may not remain the case anymore. The pride will not be soothing anymore, and Pakistan is poised to look at radical economic reforms if it has a medium-term plan in getting out of the current economic turmoil. Will PKR appreciate it again? The question remains to be answered while the country borrows more money after post successful IMF review program. 

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