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Key Takeaways:
1. As part of the stand-by agreement with the IMF, the Pakistani government aims to limit the premium between interbank and open market exchange rates to no more than 1.25 percent during any consecutive 5-day period.
2. The premium is defined as the difference between the interbank and open market rates and will be closely monitored to ensure stability in the foreign exchange market.
3. The IMF’s Staff Report highlights the challenges faced by Pakistan due to external pressures and the need to address the scarcity of dollars, disruptions in imports, and fluctuations in the exchange rate.
4. The government will refrain from providing formal and informal guidance on exchange rates, eliminate existing exchange restrictions, and maintain a framework free of restrictions on international transactions.
5. According to industry experts, the 1.25% premium limit translates to approximately Rs. 4 to Rs. 4.2.
Details
In line with the stand-by agreement with the International Monetary Fund (IMF), the Pakistani government is committed to maintaining stability in the foreign exchange market by limiting the premium between interbank and open market exchange rates. The objective is to ensure that the average premium remains within 1.25 percent during any consecutive 5-day period.
The premium is defined as the difference in the natural logarithms of the midpoint of the interbank market rate and the midpoint of the open market rate. This measure will help monitor and control abnormal fluctuations in the exchange rates across all three FX markets—interbank, open, and informal.
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The IMF’s Staff Report acknowledges the external pressures faced by Pakistan, particularly in the first half of fiscal year 2023, where foreign inflows halted and debt service drained reserves to critically low levels. Efforts were made to nudge the exchange rate to appreciate, but import-payment restrictions and a crawl-like behavior in the exchange rate fueled pressures and disrupted key imports for domestic production and exports.
To address these challenges, the Pakistani authorities have committed to refraining from formal and informal guidance on exchange rates, eliminating existing exchange restrictions, and maintaining a framework free of restrictions on payments and transfers for current international transactions. This will promote a transparent and open foreign exchange market.
The 1.25% premium limit, as set by the IMF, is estimated to be around Rs. 4 to Rs. 4.2, according to industry experts. This means that the gap between the open market and interbank rates will not exceed this amount, ensuring greater stability in the foreign exchange market.
By implementing these measures and adhering to the IMF agreement, the Pakistani government aims to restore confidence, attract foreign investment, and ensure a more stable economic environment for the country’s growth and development.
