As the government struggles to convince the IMF to resume lending to the cash-strapped country, its currency fell 7% against the U.S. dollar on Thursday.
In recent weeks, the Pakistani rupee has weakened to a record low against the dollar after foreign exchange companies were allowed in January to remove a cap on exchange rates.
Prior to the IMF’s board approving Pakistan’s funding tranche of more than $1 billion, Prime Minister Shehbaz Sharif’s government must fix the market-determined exchange rate.
Since then, Islamabad has not been able to secure the tranche, which was initially scheduled to be disbursed in December as part of a stalled $6.5 billion IMF bailout program.
Mohammed Sohail, a Karachi-based broker, said that a delay in IMF funding was causing uncertainty in the currency market.
As a result of the drawn-out negotiations between the two sides, Pakistan’s government finances and its more than 220 million people are under increased strain.
Foreign exchange reserves have plummeted to just over $3 billion, barely enough for three weeks of imports.
Food and fuel prices have soared beyond the means of many Pakistanis, according to official data published Wednesday.
In combination with a global energy crisis and last year’s devastating floods, decades of financial mismanagement, corruption, and political instability have led Pakistan’s economy to the brink of default.
In order to keep the talks with the IMF moving forward, the Sharif administration has already taken most other steps. A supplementary budget will include increases in fuel and energy tariffs, withdrawal of subsidies in the export and power sectors, and new taxation to generate additional revenue.
According to analysts, the fiscal adjustments would likely fuel inflation in Pakistan whether or not a deal with the IMF is reached.
Ishaq Dar, Pakistan’s finance minister, dismissed reports that the country was on the verge of default as “malicious rumors.”.
Despite making all external payments on time, SBP forex reserves have been increasing and are almost $1 billion higher than four weeks ago, Dar tweeted.
Indicators of economic growth are slowly moving in the right direction, Dar asserted. We expect to sign a staff level agreement next week with the IMF after our negotiations with the IMF are about to conclude. He added that foreign commercial banks had begun extending Pakistani loans.
The China Development Bank last month granted Islamabad a $700 million loan facility as a longtime ally of Pakistan.
As she spoke at last month’s Munich Security Conference, IMF Managing Director Kristalina Georgieva urged Pakistan to collect more taxes from the wealthy and spend them on the poor.
Considering how difficult the country is, why should rich people benefit from subsidies? In response to a question about the delay in reaching a deal with Pakistan, she asked, “Why shouldn’t rich people and businesses pay taxes when the country faces such tremendous challenges?”
According to Georgieva, “What is at stake is fairness in society, and we will stand for this fairness, hoping we can move Pakistan’s policies in the right direction,” she said.
Financial experts say Pakistan has long been criticized for not imposing taxes on the wealthy in a country where less than 2% pay income taxes. The rest evade it either through collusion with tax authorities or exploiting legal loopholes.
World Food Program’s latest assessment warns Pakistan’s economic crisis is “progressively deteriorating,” with a depreciated currency, rising food and fuel prices, and uncertainty over resuming a $6.5 billion funding package with the IMF.
Flood-affected people are resorting to negative coping strategies, including selling income-producing assets, taking on additional debt, withdrawing children from school, and skipping meals.