The rupee fell from Rs 231 to Rs 255 in the interbank market on Thursday, its biggest loss in percentage terms, as the government allowed its free float, one of the crucial demands by the International Monetary Fund for the resumption of its Extended Structural Adjustment Facility, with the rupee likely to sink even lower, as the market correction is not yet complete.
Federal Finance Minister Ishaq Dar has already announced the intention of taking the fiscal measures the IMF had demanded, which include a mini-budget which will raise gas and fuel prices, raising gas prices 74 percent and power prices Rs 7.50 per unit, and raising excise duties on cigarettes, drinks and luxury items, an additional withholding tax on bank transactions, as well as freely floating the rupee. The free float will have inflationary effects almost immediately. Imported goods will be sold at rates based on the new parity with the dollar and will provide windfall profits to retailers.
The real vehicle for inflation will be in fuel prices. The fall in the rupee has been enough to absorb any except the most extraordinary fall in global oil prices, with the result that there will additional inflation as goods transport and power rates become more expensive. It may be noted that Senator Dar’s attempt to defend the rupee, which was the policy measure he was best associated with, has come to an abrupt end. This was inevitable, with professional economists calling his attempts ill-advised, and with the rupee sinking lower with every trading session, it becoming clearer that the policy could not be sustained with having a lot of money to throw around. Senator Dar came to the Finance Ministry last year to bring down the inflation ruining his party’s electoral hopes. His assumption that inflation was imported proved simplistic, and instead, Pakistan is faced with the sort of inflation it has never seen.
With Pakistan down to forex reserves of around $3.3 billion, just enough to cover a few weeks of imports, that money is simply not there. With even friendly countries like China and Saudi Arabia not willing to help unless the IMF programme is restored, there is no real choice left. However, these measures might well have come very late, too late in fact to avert a default, that unthinkable eventuality which has now become a possibility every time a debt servicing payment rolls around.
from Pakistan Today https://ift.tt/ZnF5Se3
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