ECONOMYNEXT – Pakistan will get a 6 billion US dollar bailout in the wake of a currency collapse driven by attempts to artificially boost growth, the International Monetary Fund said, urging central bank reform.
Pakistan’s rupee soft-pegged to the US dollar at around 105 units up to November 2017 has collapsed to 141 by May 2019.
"Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position," the IMF mission chief Ernesto Ramirez Rigo said after reaching a staff level agreement which is to be confirmed after unspecified prior actions.
"This reflects the legacy of uneven and pro-cyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses."
A central bank that pegs a currency cannot print money to boost growth as it leads to monetary instability. A central bank will rapidly generate a balance of payment crisis if it defends the currency and then prints money to keep rates down.
To end the contradiction in monetary and exchange rate policies, IMF requires a float of the currency.
"The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability," Rigo said.
"A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy.
"The authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate."
IMF programs however also require forex reserve collections which require a peg to be maintained on the strong side of its convertibility undertaking.
However IMF programs do not always contain criteria to maintain a peg on the strong side, leading to further instability and bailouts.
In South Asia the Central Bank of Sri Lanka and State Bank of Pakistan are the top customers of the IMF.
IMF gives money primarily to bailout soft-pegged central banks, not budgets. The agency was created as part of measures to set up the Bretton Woods system of failed soft-pegs. (Colombo/May13/2019)