IMF deal uncertainty causes rupee to decline

IMF’s new demands weigh on Pakistani rupee.

The Pakistani rupee faced a significant drop during Wednesday’s trade as the market reacted nervously to news that the International Monetary Fund (IMF) had made “new demands” of the federal government.

The currency fell 4.61 or 1.73% against the US dollar to close at 266.11 in the interbank market.

Officials have revealed that the IMF has requested the implementation of four prior actions, including the permanent surcharge of Rs3.82 per unit on electricity, to pave the way for a staff-level agreement and the release of over $1 billion tranche under the $6.5 billion Extended Fund Facility (EFF) signed in 2019.

However, policymakers in Pakistan consider these prior actions unjustified. Moody’s Investors Service’s downgrade of Pakistan’s sovereign credit rating to ‘Caa3’ due to critical loan talks with the IMF has further compounded the situation.

The worsening liquidity situation has significantly raised default risks, which has caused the currency to remain under pressure.

The funds are critical for Pakistan, where foreign exchange reserves are just above $3 billion, enough for an import cover of less than a month.

The dollar scarcity in the market has caused several businesses to halt operations or shut down indefinitely, while inflation is at record highs, making life harder for the already burdened people.

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