IMF recently approved a $502 million loan tranche for Pakistan due in December this year. For the government to successfully negotiate with IMF for approval of said loan, new taxes will soon be in place to make up for the PKR 40 billion revenue shortfall in the first quarter. Pakistan Rupee has been Asia’s best performing currency for the past two years. That can be owed to certain factors such as gains in large-scale manufacturing, decline in international oil prices, pick-up in construction activities, enhanced foreign remittances and of course the China-Pak Economic Corridor (CPEC). Harald Finger, Chief of IMF Pakistan mission told the reporters in Islamabad,
If the exchange rate is going to depreciate by that amount then that would be in line with fundamentals.
In other words, the current exchange rate for Pakistan Rupee is unreal, given the fact that the PKR has been significantly stable against the USD despite U.S. dollar’s significant gain against other major currencies including EUR and GBP. In the past two years, Pakistan Rupee gained 1.7% against USD for the exchange rate to hit 105.5. Pakistan Rupee was the only currency to strengthen amongst 12 major Asian currencies. In this timeframe, USD performance compared to ten of its competitors rose close to 20.5%, which obviously shows a strong performance by the PKR. Even that being the case, the current government missed its budget deficit and revenue collection targets under the IMF loan program. As such, for those targets to be met, inflation will rise to 4.5% by the end of June next year compared to 1.6% currently.
Rise in inflation will not spell well for the current government. Pakistan’s constant failure to meet the set targets can be blamed at the government, but in their defense, countless efforts are being made to increase economic activity and development within the country, at least on the outside. Pakistan’s failure to meet tax collection targets are a major reason for such shortfalls which can be owed to corruption at higher levels, and non-payment of proper taxes by majority of the population. Efforts need to be made to resolve that situation as soon as possible. Inflation rising by 4.5% is not a happy story, to make matters worse, IMF is already thinking that Pakistan Rupee should depreciate between 5 and 20%. While that may not really happen, if it does though, we are looking at a PKR-USD exchange rate of approximately 120:1.