TAHIR AMIN

ISLAMABAD: Intern-ational Monetary Fund in its recent Article IV consultations has warned that greater exchange rate flexibility is critical and further appreciation of the real effective exchange rate would further erode export competitiveness and discourage remittances further.

This warning was stated eight times by the IMF and recently uploaded on its website.

The report raised the exchange rate issue at least 21 times and emphasized that Pakistan authorities must support greater exchange rate flexibility rather than relying on administrative measures—to help reduce external imbalances and bolster external buffers.

In the executive summary the IMF notes that “prudent monetary policy and greater exchange rate flexibility will be the key to preserve low inflation and rebuild external buffers”.

In para 4, the report notes: “International reserves have declined amid a rising current account deficit and a broadly unchanged dollar/rupee exchange rate…..the exchange rate continued to remain stable against the US dollar, supported by the State Bank of Pakistan (SBP)’s foreign exchange interventions, and further appreciated in real effective terms 6 percent during this fiscal year (18 percent cumulatively over the past three years).”

In para 7, the report states “while recognizing recent current account pressures, the authorities have not allowed for more downward exchange rate flexibility in light of sustained real exchange rate appreciation”.

In para 11, the Fund states “tightening global financial conditions could adversely impact capital inflows, and continued appreciation of the real effective exchange rate would further erode export competitiveness and discourage remittances”.

In Para 14, it emphasized that “reversing the recent decline in reserves and allowing for greater exchange rate flexibility are needed to rebuild external buffers, which are below adequate levels, and strengthen Pakistan’s competitiveness, which has been affected by real effective exchange appreciation. Based on standard models of real effective exchange rate valuation, which are subject to significant uncertainty, staff estimated that Pakistan’s external position is moderately weaker than suggested by fundamentals and desirable policies and that the real exchange rate is moderately overvalued (between 10 and 20 percent. The authorities’ own assessment suggested significantly lower currency overvaluation”.

On page 11, Box 2, the report adds “resumption of accumulation of reserves—including through allowing downward exchange rate flexibility—is needed to further strengthen buffers while also supporting competitiveness”.

In para 15, the report states that the “staff underscored that more prominence should be given to exchange rate flexibility, rather than administrative measures, to address external imbalances….allowing for greater downward exchange rate flexibility would be preferable to administrative measures and more effective as means to strengthen Pakistan’s external position”.

In para 17, the Article IV Consultation report notes that “staff stressed that allowing greater exchange rate flexibility, strengthening reserve buffers, maintaining fiscal discipline, limiting government borrowing from the SBP and ensuring its full operational independence will be important pre-conditions that will need to be in place for effective inflation targeting”.

In paragraph 13, the report states “maintaining a prudent monetary policy stance and allowing greater exchange rate flexibility are needed to preserve low inflation and re-build external buffers”.

In para 42, the Fund states “with Pakistan’s external position being moderately weaker than suggested by fundamentals, allowing for greater exchange rate flexibility, fiscal adjustment, and structural reforms would facilitate the building of external buffers and strengthen competitiveness”.

In paragraph 43, the report notes that “moving to inflation targeting over the medium term is welcome once key preconditions are in place, including greater exchange rate flexibility, stronger reserves buffers, full operational autonomy of the SBP, and reduced fiscal imbalances”.

The statement of Executive Director for Pakistan dated 14 June 2017 takes cognizance of the sustained emphasis of the report on the need to allow for greater exchange rate flexibility and he notes that “amid rising current account deficit and broadly stable exchange rate, foreign reserves have declined, but going forward, the authorities would be willing to consider greater exchange rate flexibility, as long as there is a need and appropriate conditions are in place”.