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ISLAMABAD: A market-determined exchange rate and limited State Bank of Pakistan (SBP) interventions remain crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves, says the International Monetary Fund (IMF).

The Fund in its latest report noted that the IMF Staff encouraged the Pakistani authorities to strengthen resilience, including by building reserve buffers, and limiting interventions in the foreign exchange market. Allowing greater exchange rate flexibility to address external pressures will help safeguard and improve reserve buffers towards more prudent levels. Strong macroeconomic policies and structural reforms will help further build confidence in the rupee and resolve external imbalances.

The report further noted that commitment to maintaining a market-determined exchange rate remains essential to reduce external imbalances and start rebuilding reserves. A market-determined exchange rate remains a key tool to act as a shock absorber, especially in the context of persistent terms-of-trade shocks and low reserve buffers. Notwithstanding the recent depreciation, going forward the authorities should continue to allow exchange rate flexibility and avoid suppressing any trend movement. Allowing a greater role for exchange rate flexibility to address external pressures will thus help safeguard and improve reserve buffers towards more prudent levels in line with programme targets

Staff emphasized that more prominence should be given to exchange rate flexibility as a means to address the Balance of Payment (BOP) pressures rather than to administrative and exchange measures. The authorities requested more time to eliminate all remaining restrictions when BOP conditions permit by the new end of the programme at end-June 2023.

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The reports notes SBP support for exchange rate flexibility and adequate foreign reserves as key shock absorbers, with FX interventions continuing to be limited to containing disorderly market conditions. To support the balance of payments position and reduce foreign currency outflows, the SBP imposed cash margin requirements on the import of non-essential items since late September 2021 which constitute an intensification of exchange restrictions, a MCP and import restrictions for balance of payment measures, but intends to eliminate them when feasible.

In addition, the SBP imposed a requirement for prior approval of initiating payments for imports of certain goods in late-May 2022. The authorities recognize that this constitutes an exchange restriction and intend to eliminate it as soon as market conditions allow, in consultation with the IMF.

Gross reserves declined from $17.6 billion at end-December 2021 to $9.8 billion at end-June 2022, equivalent to about 1.5 months of imports coverage, due to debt repayments and frequent intervention by the SBP to mitigate exchange rate pressures, the report noted.