A shopkeeper makes garlands with US dollars and rupee notes at a flower market in Peshawar. Photo: AFP/Abdul Majeed

With Pakistan’s foreign-currency reserves falling 29% this year to US$12.6 billion by the end of October and the country’s trade deficit ticking ever upward, Islamabad has found itself back at the International Monetary Fund (IMF) to discuss a bailout.

First on the IMF’s checklist is devaluation of the Pakistani rupee. The State Bank of Pakistan (SBP) loosened its grip on the currency on December 8, resulting in a downward adjustment in its exchange rate in interbank and open market transactions. It quickly shed over 5% against with the US dollar. Discussions regarding policy-level measures are ongoing.

Pakistan’s economy had already been showing signs of floundering before it was reported in August that the central bank had borrowed $5.81 billion from commercial banks under “forward and currency swap” arrangements to boost its reserves position and stabilize the currency. Excluding those loans, Pakistan’s actual foreign currency reserves would stand at a mere $6.79 billion. And they should be excluded, because they are not usable in any sense.

“The SBP did not deny the media reports, nor did the government issue any clarification which [disputes] the apprehension that the economy has gone haywire,” a senior executive at a Dubai-based exchange company told Asia Times. Pakistan’s reserves position was particularly alarming, he added, in light of the World Bank’s estimate, in October, that Islamabad will need $17 billion worth of external financing in the fiscal year ending June 30, 2018, to service its debt payments and current account deficit.

“How the government will honor its external commitments needs to be explained,” he said, adding that as far as any IMF package is concerned, it will come with painful strings attached (for one thing, devaluation means inflation). Any “stopgap” measures, he said, would make little impact on a current account deficit of $14.4 billion, or subdue an import growth rate of $5 billion per month on the back of China’s “Belt and Road” infrastructure drive.

Excluding those loans, Pakistan’s actual foreign currency reserves would stand at a mere US$6.79 billion. And they should be excluded, because they are not usable in any sense.

At the end of last month, the government launched Sukuk (Islamic bonds) and Euro bonds worth $2.5 billion, at a profit rate of 5.6% and 6.8%, respectively, again to prop up its reserves. It claimed the bidding reflected “overwhelming confidence of the global investor in Pakistan’s economy.” Independent financial analysts remained skeptical, however.

The SBP, in justifying its deregulation ploy last week, declared: “The continuation of high growth in imports led to a widening of the current account deficit, and consequently to depletion in the country’s foreign exchange reserves. These pressures have persisted, leading to an adjustment in interbank exchange rates. This movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market.”

Speaking at a meeting of the Pakistan Society of Development Economists on Wednesday just after the rupee slid against the dollar, SBP governor Tariq Bajwa said the exchange rate would be determined from now on by “market forces”. The aim, he said, was for the currency to attain “equilibrium.”

In the days since, however, Peshawar’s Chowk Yadgar currency market has been directionless, with exchange companies and currency dealers hesitant to do any deals around buying or selling dollars.

Read: Pakistan’s economy teetering as pleas for remedy mount

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