Pakistani rupee plummets as markets adjust to removal of unofficial controls

Highlights:

• Largest single day fall in over two decades: analysts
• Pakistan's rupee in free fall after artificial cap removed
• The move aims at meeting demands set by IMF
• Pakistan desperately needs external financing to ward off crises
• FinMin Ishaq Dar's attempts to defend rupee failed

The Pakistani rupee fell 9.6% against the dollar on Thursday, central bank data showed - the biggest one-day drop in over two decades - in a slump that may persuade the International Monetary Fund to resume lending to the country.

The drop comes a day after foreign exchange companies removed a cap on the exchange rate, a key demand of the IMF as part of a programme of economic reforms it has agreed on with the cash-strapped South Asian nation.

The currency's official value closed at 255.4 rupees against the dollar versus 230.9 on Wednesday, the central bank said.

Facing an increasingly acute balance of payments crisis, Pakistan is desperate to secure external financing, with less than three weeks worth of import cover in its foreign exchange reserves.

Pakistan secured a $6 billion IMF bailout in 2019. It was topped up with another $1 billion last year to help the country following devastating floods, but the IMF then suspended disbursements in November due to Pakistan's failure to make more progress on fiscal consolidation.

Aside from wanting the government to reduce its budget deficit, the IMF is pushing for it to move to a market-determined exchange rate regime.

The foreign exchange companies said on Wednesday that they had removed the cap for the sake of the country, because it was causing "artificial" distortions for the economy.

Wednesday's move by foreign currency dealers, whose open market rates are different from the rate notified by the central bank, had a cascade effect on official exchange rates on Thursday.

The drop in the official rate was the biggest since 1999 in both absolute and percentage terms, according to JS Global, a Pakistani brokerage house.

In the open market, the rupee weakened from 243 rupees to the dollar to 262, a drop of about 7%, having lost 1.2% the previous day, according to the Exchange Companies Association of Pakistan (ECAP) trade data.

"We requested the central bank to increase the interbank (rate) to help combat the black market," ECAP President Malik Bostan told Reuters.

The State Bank of Pakistan (SBP) did not immediately respond to a Reuters request for comment.

Aside from moving towards a market-determined exchange rate, Islamabad has also announced it will take fiscal measures recommended by the IMF.

Attempts by Finance Minister Ishaq Dar to defend the rupee since his appointment in September, including reported currency market interventions, had run counter to the IMF's advice.

The Pakistan Stock Exchange, however, reacted positively to the rupee's fall, with the KSE 100 index shooting up more than 1,000 points, or 2.5%.

"The depreciation in the rupee takes away some uncertainty regarding the economic roadmap ahead and resumption of the IMF programme, which the market is responding positively to," Tahir Abbass, Head of Research at Arif Habib Limited, said.

Topline Securities, a Karachi-based brokerage house, said the sharp fall in foreign exchange reserves from $8 billion in September to $4.6 billion as of 13 Jan led to a widening in the spread between the official and open market rates, and created a black market for dollars due to the low supply.

The sudden drop in rates hit banks hard. According to two officials in commercial banks operating in Pakistan, banks that had earlier borrowed at 230 rupees to the dollar to make payments by running open positions now have to settle payments at a rate of 250 rupees.

The officials told Reuters on condition of anonymity that banks that were hit the hardest are those that did not have adequate dollar inflows.

The Finance Ministry did not respond to a Reuters request for comment.