ISLAMABAD:Pakistan’s Deputy Prime Minister Ishaq Dar saidthat, based on the economic fundamentals, the rupee’s value should not be more than Rs240 to a dollar. He opposed a flexible exchange rate regime, arguing that it was damaging both the economy and the general public.
Speaking at the Pakistan China Institute forum, Dar also expressed hope for a major reduction in interest rates in the upcoming monetary policy committee meeting, citing a steep slowdown in inflation rates. According to the Real Effective Exchange Rate (REER) for September, the rupee-dollar parity should have been Rs235 to Rs240 to a dollar, said Dar, who is also the foreign minister. The REER is the inflation-adjusted value of the local currency compared to other currencies.
His statement aligns with some independent assessments, which indicate that the central bank has kept the rupee at an artificially lower value of Rs278 to a dollar. According to the September REER, the rupee is undervalued by Rs38 or roughly 16% per dollar. Dar stated that the higher dollar value was contributing to inflation and increasing the external debt burden.
The deputy prime minister further stated that he was not in favour of a free exchange rate regime, asserting that there should be only one indicator: the REER. Dar, who has been a strong proponent of a stable currency, clarified that this was his personal view.
One of the core objectives of the International Monetary Fund (IMF) programme is to establish “appropriate monetary policy to bring down inflation and exchange rate flexibility to aid in the rebuilding of reserves.” At the time of the approval of the $7 billion programme last month, IMF directors emphasised the importance of allowing the exchange rate to serve as a shock absorber, enhancing competitiveness and helping rebuild reserves.
The IMF’s recommendations included maintaining an appropriately tight monetary policy, with positive real interest rates on a forward-looking basis, ensuring exchange rate flexibility and proper functioning of the foreign exchange market, and strengthening institutional frameworks to safeguard financial sector stability. The IMF programme aims to bring Pakistan’s gross reserves to at least three months of imports, supported by disbursements from multilateral and bilateral loans as well as foreign exchange purchases.
