IMF suggests higher interest rate, rupee depreciation
The Express Tribune
Oct 4, 2018
ISLAMABAD:
As disagreement persists on the measures required to put the economy back on a strong footing, the International Monetary Fund (IMF) has suggested to Islamabad to raise interest rate to double digits and let the currency weaken by at least 15% more in the current fiscal year.
During ongoing parleys, the IMF termed recent fiscal and monetary adjustments by Pakistan inadequate, said highly placed sources in the finance ministry. Headed by its Washington-based mission chief Harald Finger, the staff-level talks are expected to be concluded on Thursday.Another key concern for the IMF was that the government appeared complacent and was not moving swiftly to address macroeconomic imbalances, threatening the country’s economic viability.
The Finance Minister himself said that Pakiland is undergoing heart surgery. And now, the IMF (Doctor from DC) has suggested that Pakistan take the bitter medicine of higher interest rate and rupee depreciation , if it wants to get healthy again . Pakistan , like a small child refuses to take the medicine
During the last leg of the staff-level talks, the IMF assessed that the budget deficit may widen to over 5.5% of gross domestic product (GDP) or Rs2.1 trillion, even after the additional revenue measures introduced through a mini-budget, according to sources.
The additional revenue projections look good on paper. Are they realistic and implementable ( tax collection ) in entirely a different ball game !
The major difference of opinion between Pakistan and the IMF was on the extent of currency depreciation, increase in interest rate and fiscal impact of recent budgetary measures, sources said.The IMF desired that Pakistan should increase interest rate to around 11%, terming the current 8.5% rate insufficient to restrict inflation and narrow down the current account deficit, they said.
. The average Abdul is being squeezed already ( higher petrol, higher gas prices ) . Why not reduce defense expenditure by 10% and give everyone a relief
Another key point of disagreement was the exchange rate parity. The central bank was of the view that the exchange rate of Rs137 to a dollar by the end of current fiscal year in June 2019 would be sufficient to address the challenges, an assessment that the IMF did not agree with, sources said and added the fund wanted the rupee to be traded above Rs145 to a dollar.
Export will be able to export more footballs and towels by doing this !
However, in case Pakistan decides to obtain an IMF loan to bridge its yawning external financing gap, the double-digit interest rate and further depreciation of the rupee could become a priority, the sources said.
The Saudis have only "promised" oil on deferred payment basis . Nothing else !
Since January this year, Pakistan has already increased interest rate by 275 basis points to 8.5%, which is the highest increase by any Asian country.
Or alternatively reduce ISI and military budget which will also help the pressure on the Paki rupee
Similarly, Pakistan has also let its currency weaken by 11.2% since January. India is the only country whose currency has lost over 12% during this period, which is more than Pakistan’s depreciation.
So, Pakistan currency depreciation is less than India's . Win for Pakistan , loss for India
The IMF was of the view that due to the higher budget deficit, the central bank would be required to further tighten the monetary policy. It observed that a 25-basis-point increase in interest rate would not have a major impact on Pakistan’s economy.
It is up to Pakistan to take the medicine or not take the medicine ! Reduced expenditure on nihari, biryani, and halwa ( defence expenditures ) will also help in improving Pakistan's health
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