New Delhi: Pakistan’s currency fell 9.6% against the dollar on Thursday, January 26, the biggest one-day drop in over two decades, Reuters reported, after the nation’s foreign exchange companies removed the limit on the dollar-rupee rate from Wednesday.
The Pakistani rupee plunged to a record low of Rs 255.43 against the dollar in the interbank market on Thursday, sliding Rs 24.54 from Wednesday’s close.
The Exchange Companies Association of Pakistan told the news agency that it was removing the price cap to reduce volatility in the currency, as the nation struggles to escape a deepening economic crisis.
The foreign exchange markets said that the currency cap had caused “artificial” distortions and created a black market, where the US currency was selling at higher rates. As a result, the rupee depreciated to Rs 252.5 in early open market trade, the report said.
It was the largest single-day decline in both absolute and percentage terms since the introduction of the new exchange rate system in 1999, Ismail Iqbal Securities’ head of research Fahad Rauf told Dawn.
However, Pakistan’s markets have responded positively to the move to remove the currency cap, with the Pakistan Stock Exchange’s benchmark index rising 1.77%.
The removal of the price cap will allow the rupee to depreciate to its actual value against the dollar.
The country has been facing a crisis similar to Sri Lanka, with high inflation rate and a weak currency. The central bank increased the benchmark interest to 17% – a 24-year-high – to control inflationary pressures.
In 2019, the International Monetary Fund (IMF) had extended a $6.5 billion loan to Pakistan with tough conditions to help its ailing economy. About half of it has already been disbursed, however, the loan agreement was stalled because Pakistan has not implemented the tough economic measures.
The Express Tribune had reported that that the IMF had urged the government to implement the market-based exchange rate. It also had strong apprehensions that the Pakistani authorities were artificially controlling the exchange rate through administrative pressures on banks and currency exchange dealers.
Dawn reported that the financial sector had urged finance minister Mohammad Ishaq Dar to stop ‘managing’ the rupee-dollar parity, as the country’s foreign exchange reserves declined rapidly.
According to Reuters, the move to lift the cap on the dollar-rupee rate may persuade the IMF to resume lending to the country.
“Pakistan is showing its willingness and finally conceding to IMF demands to secure funds after a long period of reluctance,” Naveed Vakil, chief operating officer at AKD Securities Pvt Ltd. in Karachi told Bloomberg. “The IMF is firmly positioned on Pakistan maintaining a market-based exchange rate and today’s move has given markets the confidence that officials will now complete the remaining required conditions to continue the IMF program.”