Troubled Pakistan takes tough steps for bailout from IMF

Pakistan’s moves to loosen its grip on the currency and hike in fuel prices indicate the beleaguered nation is finally making the unpopular decisions needed to secure a $6.5 billion bailout program from the International Monetary Fund.

AKD Securities Ltd. The rupee fell to as low as 270 per dollar on Monday, according to the foreign-exchange desk of the US, as authorities allowed the currency to be determined more by the market, one of the IMF’s pre-conditions for the loan. The government raised gasoline prices to a record over the weekend, ahead of an IMF team arriving on Tuesday for a debt review after months of delaying the next loan tranche.

Pakistan plunges deeper into crisis amid a dollar shortage and rising inflation, prompting calls for Prime Minister Shehbaz Sharif to secure funds from the IMF. The country is in dire need of funds as its reserves dwindled to $3.7 billion in less than a month to cover imports.

“Pakistan has become serious about the IMF program taking these decisions even though we are in an election year,” said Sulaiman Rafiq Maniya, head of advisory at Vector Securities Pvt Ltd. “Everything depends on the IMF team visit and their response. These measures are painful and come at a heavy political cost.”

Sharif has said his coalition government is committed to completing the bailout plan after delays in implementing key decisions, even if it means paying a political price months away from national elections. The country’s economic managers, led by Finance Minister Ishaq Dar, have a tough task ahead, who will need to convince the IMF that the country is prepared to implement tougher measures, including raising taxes and gas prices.

Major markets are facing more pressure to loosen their grip on currencies as they seek IMF financing, which would help improve their current-account balances. This month Egypt faced a third devaluation in less than a year. According to a note issued on Monday by Ankur Shukla, an analyst in Mumbai, calculations by Bloomberg Economics suggest the rupee should stabilize at 266 per dollar.

In Pakistan, the rupee’s decline this month was triggered by a decision by currency exchange companies to end limits on the dollar-rupee rate in the open market. The dollar supply dried up among onshore money-changing businesses as locals turned to the black market, as the greenback was being sold at around 10% above advertised rates.