The country has enough foreign currency left to cover less than one month’s worth of imports
ISLAMABAD, Pakistan—The International Monetary Fund said Thursday it would send a team to Pakistan to hold talks on restarting a stalled bailout program as the debt-plagued country, now at risk of default, saw its currency fall to a record low against the dollar after allowing it to float freely.
The move to free the rupee, removing import controls and dropping instructions to foreign exchange retailers to restrict trading, was a key condition from the IMF for resuming bailout talks. It fell 10% against the dollar, hitting 255 rupees, its biggest daily fall in over 30 years.
Economists see Pakistan as one of the emerging economies most at risk of default after devastating floods inundated vast tracts of farmland last summer. The country has enough foreign currency left to cover less than one month’s worth of imports, with the central bank saying Thursday that it had $3.7 billion in reserves. The central bank said this week that the country must repay $8 billion of debt by June—though it said $5 billion of that was expected to be rolled over.
With an election due in a few months, Pakistan’s government had been resisting the IMF requirements, many of which were expected to cause considerable economic pain for ordinary people. Prime Minister Shehbaz Sharif‘s administration had also vowed to maintain the strength of the rupee as a political goal, but this also whipsawed the economy after the government used import controls to try to stem the depletion of foreign reserves.
Some factories had to halt production because of a lack of imported raw materials and components. Industrialists have warned of large scale job losses to come as a result. Consumers have often been unable to withdraw foreign currency from their bank accounts because of the shortage of dollars available to the banks.
The IMF program is important for unlocking billions of additional dollars in loans from allies and multilateral lenders, which require the discipline and oversight of the IMF to be in place. The pledges include an extra $3 billion promised this month by Saudi Arabia and the United Arab Emirates.
“There is a sigh of relief,” said Mohammad Sohail, chief executive of Topline Securities, a Pakistani stockbroker. “But it does not mean that Pakistan’s problems are over.”
The IMF said its mission would arrive in Pakistan on Jan. 31. Any agreement with the Pakistani authorities would then need to be put to the IMF board for approval.
“Stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook,” the IMF said.
The government is now expected to raise taxes and increase the prices of electricity, natural gas and gasoline by removing subsidies. Inflation, recorded officially at 25% in December, is expected to be pushed significantly up.
There was no immediate comment from the government. Elections are due by October, with opposition leader Imran Khan already using the rate of inflation as a campaigning tool.
Pakistan has fallen into repeated balance of payments crises over past decades, with the current IMF program being the 22nd bailout taken by the country.