KARACHI: The increasing difference between the interbank and open market rates of the dollar has thrown up a challenge for the government as the Standby Arrangement (SBA) with the International Monetary Fund requires it to keep the differential down to 1.25 per cent.

The differential has now soared to 5.6pc.

A key condition of the $3bn SBA, signed last month, relates to the market-determined exchange rate.

“Steadfast policy implementation is vital for Pakistan to overcome its current challenges through greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms,” said the IMF.

Unrelenting rise

The dollar has trampled upon all barriers since the IMF deal, shooting up to Rs302 in the interbank market on Monday. The open market unofficial rate, which is close to the real rate, was Rs319 — a difference of 5.6pc.

The rupee has been steadily weakening after the IMF deal, registering a depreciation of Rs26.5 in six weeks. It has lost Rs13.51 since the caretakers took over earlier this month.

“The IMF is expected to review the SBA in November. There are still two months to go, but there is little likelihood that the State Bank would be able to bring down the differential to 1.25pc,” said Atif Ahmed, a currency dealer in the interbank market.

Although the interbank dollar rate is considered close to the official price, the open market rates being released by exchange companies are far from real.

The Exchange Companies Association of Pakistan quoted the dollar price at Rs315 on Monday, up from Rs314 recorded the previous working day. The price was lower than the rates quoted in the market, which ranged between Rs319 and Rs321.

The open market is heading fast towards the grey market area, which has attracted millions of dollars in the shape of remittances and export proceeds.

Uphill task

Analysts believe the current situation represents an uphill task for the government to convince the IMF that the country deserves the next tranche of SBA.

They said the IMF would scrutinise the entire economy and the performance in key macro indicators.

The IMF had earlier said the new SBA would support the authorities’ immediate efforts to insulate the economy against external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners.

The new SBA will also create space for social and development spending through improved domestic revenue mobilisation and careful spending to help address the nation’s needs.

Published in Dawn, August 29th, 2023