Stand-by agreement conditions: IMF wants Pakistan to stop its intervention in exchange rate market

IMF wants Pakistan to stop its intervention in exchange rate market

The International Monetary Fund (IMF) has imposed strict conditions on Pakistan by asking it not to intervene in the exchange rate market.

In its recent staff report on the $3 billion Stand-by Arrangement (SBA), the IMF highlighted how the lack of transparency from the central bank and the government’s manipulation of the exchange rate market during periods of mounting pressures caused issues.

IMF has said that the average premium between the interbank and open market exchange rates, during any consecutive five business days, should not exceed 1.25 per cent. This difference amounts to approximately Rs4 per dollar (at the present value).

The IMF noted that Pakistan’s reliance on administrative measures to manage imports since May 2022 and its tightly controlled exchange rate since September 2022 intensified external pressures by discouraging inflows, particularly remittances and significantly hindered economic growth.

The global money lender added that efforts to manipulate the exchange rate market informally began in the fall, including exerting moral suasion on banks to influence the exchange rate. IMF stressed that instead of relying on administrative and exchange measures, a functioning and flexible exchange rate market should be the primary means to address Balance of Payments (BOP) pressures.

In a Letter of Intent to the IMF, Finance Minister Ishaq Dar and the State Bank of Pakistan (SBP) agreed not to provide formal or informal guidance on the exchange rates of foreign exchange intermediaries.

Overall Pakistan has accepted ten major conditions, along with thirteen other performance and indicative targets that will pave the way for the $3 billion package during July 12 to April 2024.

One of the conditions made the government increase electricity prices before the end of July, with effect from July 1. The government also has to discontinue granting any tax amnesty or tax concessions.

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