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Crisis in Pakistan: What happens as the rupee plummets to a record low?

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Pakistan appears to be breaking apart. The government, governed by Shehbaz Sharif, is struggling with hours-long blackouts and increasing food prices, and on Thursday the currency of the country fell to a record low.

In the interbank market on Thursday, the Pakistani rupee plunged to a record low of Rs 255.43 versus the dollar, a loss of 9.61% and the largest one-day decline in more than 20 years. According to Fahad Rauf, the head of research at Ismail Iqbal Securities, it was the biggest one-day loss in both absolute and percentage terms since the new exchange rate system was implemented in 1999.

What is actually happening in Pakistan, though? Why did the Pakistani rupee fall so much? What will happen to the country in crisis next?

The drop in currency

A day after foreign exchange firms lifted their exchange rate cap in order to secure crucial loans from the International Monetary Fund (IMF) to rescue the crisis-hit economy, the rupee experienced a record decline.

Imran Khan, the prime minister of Pakistan at the time, arranged for the IMF to provide the country with a multibillion dollar package when the economy was in trouble in 2019. The deal, however, remained in limbo since Islamabad did not use a market-based currency rate.

Currently, as the nation’s economic situation intensifies and its foreign reserves are perilously low (just enough to cover about three weeks of imports), the authorities removed the exchange rate cap and said that they will continue to let the currency to slowly depreciate.

According to Naveed Vakil, chief operating officer of AKD Securities Pvt Ltd in Karachi, Pakistan is now giving in to IMF demands to get funding after a protracted period of resistance. The IMF is adamant that Pakistan retain a market-based exchange rate, and today’s action has given markets confidence that government officials would now fulfil the final requirements to keep the IMF programme going.

The Pakistan Stock Exchange (PSX) rose by 1,200 points as a result of the judgement before settling at a gain of 1,061 points at the end of the trading day.

Pakistan’s poor economic state

The nation’s economy has been in crisis, and things have gotten worse in recent months. The foreign exchange reserves, according to the State Bank of Pakistan, reached a fresh nine-year low of $3.678 billion for the week ended on January 20.

Shipping containers full of imports, including raw materials for industries, food items, and medical equipment, are stacking up at Pakistani ports as a result of the sharp decline in foreign exchange reserves, as purchasers are unable to get the dollars necessary to pay.

Over 200 million people are in extreme suffering in the South Asian country as food and energy shortages cause inflation to soar to previously unheard-of levels. Both food and non-food prices rose an alarming 28.7% across the nation.

Rice, wheat, lentils, and salt all increased in price by 50% during the same period, and onions, a staple food, increased in price by 500%. There have also been reports of a shortage of wheat flour in the nation, which has caused prices to skyrocket to as much as Rs 3,100 for a 20-kg bag.

According to the World Food Programme, between September and December, there will be an increase in the number of individuals experiencing food insecurity, from 6 million to 8.5 million.

The nation has experienced a severe power crisis in addition to rising food prices; Pakistan reported a significant blackout last Monday. Businesses and hospitals remained closed, resulting in unimaginable suffering and potential billion-dollar economic losses.

Pakistan’s government earlier this month issued an order requiring wedding venues, markets, and retail centres to close at 8:30 p.m. in order to conserve electricity.

What Pakistan’s future holds

There appears to be hope coming in the form of the IMF while the people of Pakistan battle everyday for food and energy.

An IMF mission would visit Pakistan later this month to talk about the ninth review of the country’s continuing funding programme, which has stalled, according to a report on Friday. According to Esther Perez Ruiz, the lender’s resident representative, “At the request of the authorities, an in-person Fund mission is scheduled to visit Islamabad 31 January-9 February to continue the negotiations under the ninth EFF review.”

The mission, according to Ruiz, will concentrate on improvements to the power industry and measures to strengthen the budgetary position while aiding flood victims. These measures aim to restore domestic and external sustainability.

A $6 billion IMF bailout for Pakistan was negotiated in 2019 and was increased by $1 billion the previous year. The assistance of the IMF is vital for Islamabad because there are concerns that Pakistan could follow Sri Lanka’s example.

For the uninitiated, the IMF was established in 1944 and has grown to be known as the world’s “financial crisis firefighter” due to its success in offering financial assistance to nations experiencing crises in order to give them breathing room. Member nations, primarily through their quota payments, provide the IMF with the funding for its loans.

Multilateral and bilateral arrangements can complement quota money and play an important role in the IMF’s crisis assistance to member nations.

Watching what transpires in the South Asian nation in the coming months will be worthwhile given that it is not only dealing with an economic crisis that was exacerbated by the terrible floods last year, but also political instability brought on by the conflict between the former premier Imran Khan and the current administration.

ALSO READ: Breaking the cycle: First time in 12 years India invites Pakistan’s FM to SCO meet

Aaradhya is working as a Sub-Editor at The Vocal News. She enjoys writing about gadgets and automobiles because she is a tech and automotive fanatic. She has done her bachelors in Journalism and Mass communication from Makhanlal Chaturvedi Rashtriya Patrakarita Vishwavidyalaya. "I write to discover what I know."

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