IMF assumes far less-than-expected rupee fall

[Shahzaz ud din]

IMF assumes far less-than-expected rupee fall
By Shahbaz Rana
Published: December 26, 2019
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PHOTO: REUTERS

ISLAMABAD: New assumptions by the International Monetary Fund (IMF) suggest that the average exchange rate at the end of this fiscal year could be Rs160.64 to a dollar, which is significantly lower than the steep depreciation the global lender had predicted while designing the $6-billion loan programme.

The fresh valuation is 6.9% or Rs11.9 less as compared to the IMF’s working in June this year when it valued the rupee at Rs172.53 to a dollar. Still, the IMF implicitly suggests 3.8% or Rs5.94 average depreciation in the value of the rupee in the remaining period of current fiscal year.

The new valuation of Rs160.64 is better than market expectations and underlines an orderly transformation to the market-determined flexible exchange rate regime.

These exchange rate assumptions are taken from the IMF’s staff-level report, released this week after the completion of first review of the $6-billion bailout package.

The rupee is relatively stabilising despite the fact that the State Bank of Pakistan (SBP) has purchased $1.8 billion from the inter-bank market from July 1 to November 29, according to the IMF report.

In the staff-level report, the IMF has not again explicitly stated the exchange rate valuation. These numbers have been worked out on the basis of a backward working of current account deficit projections that still show that the rupee would keep losing its value under the IMF programme and beyond it.

In July this year, the IMF said the “published staff report on Pakistan includes exchange rate assumptions which are not predictions. Under the IMF-supported programme, there is not an agreed target level for the exchange rate, which is market-determined”.

The average exchange rate of Rs160.64 to a dollar by June 2020 means that the year-end rupee-dollar parity comes to Rs172 to a dollar as against previous rate of Rs188.

Both the IMF and the Pakistan Tehreek-e-Insaf (PTI) government were of the firm view that due to an overvalued rupee during the PML-N tenure, exports were underperforming. However, despite a significant devaluation since January 2018, the exports are still not performing well.

One of the factors undermining the exports is a constant rise in the cost of doing business due to higher taxes, transport cost and increasing prices of electricity and gas.

Earlier in its July staff-level report, the IMF had assumed the value of the rupee at Rs172.53 to a dollar. The Rs160.64 valuation is Rs11.89 or 6.9% lower than the previous assumption, showed the latest report. Due to relative stability in the value of the rupee, the IMF has also cut its average inflation forecast to 11.8% from 13%. However, the under-consideration mini-budget may keep inflation at elevated levels.

The federal government is making preparations for introducing a mini-budget to slap nearly Rs150 billion worth of additional taxes after it failed to ensure 45% growth in revenues despite slapping Rs735 billion worth of additional taxes in June.
The Express Tribune has worked out the value of the rupee from fiscal year 2019-20 to fiscal year 2022-23 – the last year of the PTI government – on the basis of current account deficit projections that the IMF has given for five years in the staff-level report.

The average exchange rate that at the end of fiscal year 2018-19 was Rs135.4 to a dollar has now been assumed at Rs175.2 in fiscal year 2022-23. Earlier, the IMF had assumed the valuation at Rs198.8 in 2022-23. IMF’s new assumptions show a depreciation of Rs16.2 to a dollar as against its previous assessment of Rs63.4 to a dollar or 47% in four years (2019-2023).

Resultantly, the size of Pakistan’s economy that was earlier estimated at $312 billion at the end of Prime Minister Imran Khan’s term, is now projected at $353.8 billion in 2022-23. The devaluation pulled the size down to $283 billion at the end of first year of the PTI government.

The IMF report suggested that at the end of fiscal year 2019-20, the average exchange rate could be Rs160.64 to a dollar, indicating depreciation of Rs5.9 or 3.8%.

The size of the economy is estimated at $275.8 billion or Rs44.3 trillion for this fiscal year, which is the second year of the PTI government. For fiscal year 2020-21, the IMF has assumed the average exchange rate of Rs169 as against previous valuation of Rs183.2 to a dollar. This suggests Rs8.4 or 5.2% depreciation over the closing average rate of current fiscal year. The size of Pakistan’s economy is assumed at $296.6 billion or Rs50.2 trillion.

For fiscal year 2021-22, the IMF assumption is that the value of the rupee could be Rs172 as against previous assumption of Rs191.75 to a dollar. This indicates less than 2% devaluation. The size of the economy is estimated at $326 billion or Rs56.1 trillion. For the last year of the PTI government, the assumptions suggest that average exchange rate could be Rs175.2 to a dollar – a level that the IMF had earlier assumed for this fiscal year. The size of the economy could be $353.8 billion or Rs62 trillion.

Published in The Express Tribune, December 26th, 2019.

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Read more: Business , Dollar , economy

 

[Cornered Tiger]

IMF will keep getting shocks now, because the IMF staff level reports does not include the external economic factors like industrialization, agriculture, live stock and even remittances.

Pakistan is moving fast towards industrialization, better agriculture, live stock and high remittances now. So all IMF estimates will be in vain. InshaAllah. Rupee will remain stabilized until 2021 and onward. It may even appreciate faster then one can think as of today.

 

[crankthatskunk]

In my opinion, 100 rupees to a dollar should be a target for Pakistan in very near future after rupee gain stability in few years.
Dar caused Pakistan untold damage by artificially supporting the rupee. The crook manipulated all the data, he also bought dollars on high interest rate to keep in the SBP to achieve a completely arbitrary exchange rate.

With rapid development in next few years, the rupee would settle naturally and according to the market force close to 100 rupees to a dollar.

 

[War Thunder]

In my opinion, 100 rupees to a dollar should be a target for Pakistan in very near future after rupee gain stability in few years.
Dar caused Pakistan untold damage by artificially supporting the rupee. The crook manipulated all the data, he also bought dollars on high interest rate to keep in the SBP to achieve a completely arbitrary exchange rate.

With rapid development in next few years, the rupee would settle naturally and according to the market force close to 100 rupees to a dollar.

Man I remember when a pepsi bottle used to be 5 - 8 Rupees back in 90's.

 

[volatile]

First of all the understanding is required why Rupee gets devalued and what factors influence them .The main reason is balance of payment ,in the last 3 Quaters the Govt made tall claims of reducing the trade deficit but in reality till date is only net decrease is done in Imports where as exports are increased by 3% value wise volume wise its another story . The FDI which jumps in the last few months is due to T-Bills (Short term @13% KIBOR) one of the highest profit rates in the world . when and if these TBills will be matured we will see a trigger effect in rupee as no net increase in revenue is done on permanent basis .For Imports the reduction is only at raw material level.

 

[Syed1.]

First of all the understanding is required why Rupee gets devalued and what factors influence them .The main reason is balance of payment ,in the last 3 Quaters the Govt made tall claims of reducing the trade deficit but in reality till date is only net decrease is done in Imports where as exports are increased by 3% value wise volume wise its another story . The FDI which jumps in the last few months is due to T-Bills (Short term @13% KIBOR) one of the highest profit rates in the world . when and if these TBills will be matured we will see a trigger effect in rupee as no net increase in revenue is done on permanent basis .For Imports the reduction is only at raw material level.

I know you are a patwari and have to do pooja of suwar Sharif, but atleast don't lie through your teeth. Exports grew 5% in just the first quarter of current fiscal year. They increased by 10% y-on-y in November. Trade deficit has been nearly halved and here you are saying no significant change in trade deficit. FDI has increased by 73% in current fiscal year to date.


Please educate yourself first then talk.

 

[PakSword]

Man I remember when a pepsi bottle used to be 5 - 8 Rupees back in 90's.

Do you remember the era of Pepsi Mini? It was 1.5-2.5 Rs when it was first introduced in early 90s.

 

[Darth Vader]

Man I remember when a pepsi bottle used to be 5 - 8 Rupees back in 90's.

In my opinion, 100 rupees to a dollar should be a target for Pakistan in very near future after rupee gain stability in few years.
Dar caused Pakistan untold damage by artificially supporting the rupee. The crook manipulated all the data, he also bought dollars on high interest rate to keep in the SBP to achieve a completely arbitrary exchange rate.

With rapid development in next few years, the rupee would settle naturally and according to the market force close to 100 rupees to a dollar.

Lowering the Dollar Price wont do much as it will go back.
Pakistan needs to setup proper base so the growth of smaller industry continues no matter who is in power.
Pakistan needs to set a Quality check for products which are made in Pakistan that will help its local production in Pakistan as well as for Export.
Setting up benchmark level similar to west will make it easier small traders in exporting.
Pakistan Needs to work hard on in its diary growth many of the products which pakistan was importing should be the other way around.

Until you see a change at lower level it wont affect the ground reality

 

[War Thunder]

Do you remember the era of Pepsi Mini? It was 1.5-2.5 Rs when it was first introduced in early 90s.

Don't remember that, was a kid back then.
But still, being able to buy some good candies with "8 ana" and even having those coins "8 ana and 4 ana" and that 1 rupee and 2 rupee notes.
I suppose dollar would've been around 10 - 15 Rupees back then?

 

[PakSword]

Don't remember that, was a kid back then.
But still, being able to buy some good candies with "8 ana" and even having those coins "8 ana and 4 ana" and that 1 rupee and 2 rupee notes.
I suppose dollar would've been around 10 - 15 Rupees back then?

I was a kid too.. that's why Pepsi/ Coke minis were a treat for me..

The first time I looked at the dollar value (I think it was 1991) it was 20 rupees.. I think when Zia ul Haq died, Pakistan had 80 or 800 million USD foreign debt..

 

[Zhukov]

Structural Changes are required for Pakistani Economy or else nothing will change. The state of "Import Dependence" that our industry is currently in, We cant even afford to grow beyond 5% or it will create balance of Payments deficit.
Their should be more money spent on R&D by any means necessary or this economy that for example produces cheap Textiles and cannot even produce Stitching machines for its Textile mills is a lost cause.
Frankly i think that the current Entrepreneur Class of Pakistan isn't even capable of pulling this off. May to next generation is capable enough.
Just look around and ask your selves majority of the both Businessmen and Bureaucrats are sore looser without any vision or direction. These two people are the backbone of a country.

 

[xyxmt]

Man I remember when a pepsi bottle used to be 5 - 8 Rupees back in 90's.

I remember 75 paisa Coke.

 

[crankthatskunk]

First of all the understanding is required why Rupee gets devalued and what factors influence them .The main reason is balance of payment ,in the last 3 Quaters the Govt made tall claims of reducing the trade deficit but in reality till date is only net decrease is done in Imports where as exports are increased by 3% value wise volume wise its another story . The FDI which jumps in the last few months is due to T-Bills (Short term @13% KIBOR) one of the highest profit rates in the world . when and if these TBills will be matured we will see a trigger effect in rupee as no net increase in revenue is done on permanent basis .For Imports the reduction is only at raw material level.

This is very very naive statement indeed.
For any country increasing the export is most difficult indeed.

The export is amalgamation of,

1- Competitive pricing and products. Pakistan is hampered by high prices of energy, both electric and gas. Due to these factors Pakistan lost their market shares to Bangladesh. Our cost of production was so high compares to others that we couldn't compete and the business was gobbled by other countries. PTI is bringing the dreaded "Circular Debt" down. But the prices of fuels and energy are still rising due to simple fact that Pakistan imports fossil fuels, which are more expensive due to the weakening of the rupee. This is simple economics.

2- Second other important aspect for export is industrial base. No small thanks to the corrupt parties and their policies, Pakistani industrial base evaporated and industrialists moved their factories to Bangladesh, Kenya and Ethiopia etc.

You are not expecting PTI to overnight re-establish and increase Pakistan's industrial base, do you!!

 

[Cornered Tiger]

exports are increased by 3% value wise

Correction: 5%. Will continue to increase from now on.

The FDI which jumps in the last few months is due to T-Bills (Short term @13% KIBOR) one of the highest profit rates in the world

Please mention the real interest rate as well? This is an investment, investors will get returns according to real interest rates.

For Imports the reduction is only at raw material level.

It seems you have not seen the import levels yet. Most of the raw materials are still subsidized and there is very nominal decrease in major raw materials. If you are talking about Auto-industry, they destroyed themselves. They could not even produce spare parts in Pakistan since having long presence here.

 

[Rusty]

Man I remember when a pepsi bottle used to be 5 - 8 Rupees back in 90's.

How much is it now?

I used to remember in the 90s when I visited pakistan as a kid i would always look for 7 rupees as that was how much a Pepsi bottle was.

Those were good memories of hitting up all mamus and khalas for 1 rupee each

Structural Changes are required for Pakistani Economy or else nothing will change. The state of "Import Dependence" that our industry is currently in, We cant even afford to grow beyond 5% or it will create balance of Payments deficit.
Their should be more money spent on R&D by any means necessary or this economy that for example produces cheap Textiles and cannot even produce Stitching machines for its Textile mills is a lost cause.
Frankly i think that the current Entrepreneur Class of Pakistan isn't even capable of pulling this off. May to next generation is capable enough.
Just look around and ask your selves majority of the both Businessmen and Bureaucrats are sore looser without any vision or direction. These two people are the backbone of a country.

100%

We have a society that is rent seeking instead of innovating.
We need a cultural shift... But for that to happen we need fundamental change in how we educate children. Change that many even in PDF will oppose.
(Ie: treating kids like small humans, instead of investment animals)