© Reuters. FILE PHOTO: A currency trader counts Pakistani Rupee notes as he prepares an exchange of U.S dollars in Islamabad, Pakistan December 11, 2017. REUTERS/Caren Firouz/File Photo
By Ariba Shahid and Asif Shahzad
KARACHI, Pakistan (Reuters) -The Pakistani rupee fell about 7% against the dollar in the inter-bank market on Thursday, two days after foreign exchange companies removed a cap on the exchange rate, in a move that could help convince the International Monetary Fund to resume lending.
Facing an increasingly acute balance of payment crisis, Pakistan is desperate to secure external financing, with less than three weeks worth of import cover in its foreign exchange reserves.
Pakistan secured a $6 billion IMF bailout in 2019. It was topped up with another $1 billion last year to help the country following devastating floods, but the IMF then suspended disbursements in November due to Pakistan’s failure to make more progress on fiscal consolidation.
Aside from wanting the government to reduce its budget deficit, the IMF is pushing for it to move to a market-determined exchange rate regime.
The foreign exchange companies said they had removed the cap for the sake of the country, because it was causing “artificial” distortions for the economy.
The rupee’s official rate, in the inter-bank market, weakened by 7% to 248 per dollar on Thursday, having shown little change on Wednesday.
In the open market, the rupee weakened from 243 rupees to the dollar to 255, a drop of about 5%, on Thursday, having lost 1.2% the previous day, according to the Exchange Companies Association of Pakistan (ECAP) trade data.
“We requested the central bank to increase the interbank (rate) to help combat the black market,” ECAP President Malik Bostan told Reuters.
The State Bank of Pakistan (SBP) did not immediately respond to a Reuters request for comment.
Aside from moving towards a market-determined exchange rate, Islamabad has also announced it will take fiscal measures recommended by the IMF.
Attempts by Finance Minister Ishaq Dar to defend the rupee since his appointment in September, including reported currency market intervention, had run counter to the IMF’s advice.
Topline Securities, a Karachi based brokerage house, said the sharp fall in foreign exchange reserves from $8 billion in September to $4.6 billion as of Jan. 13 led to a widening in the spread between the interbank and open market rates, and created a black market for dollars due to the low supply.
The Finance Ministry did not respond to a Reuters request for comment.