The document discusses Pakistan's currency devaluation and relationship with the IMF. It summarizes that Pakistan frequently borrows from the IMF, which requires meeting economic targets. Recent IMF meetings expressed concerns that Pakistan's currency is overvalued, and debt from China's CPEC projects could strain Pakistan's ability to repay IMF loans. The IMF is calling for currency devaluation and economic reforms, though devaluation often increases inflation and debt in Pakistan without boosting exports.

1. PAKISTAN CURRENCY DEVALUATION December 2017
11
Currency Devaluation
The purpose of this newsletter is to provide
insight information about Pakistan Overall
External Debt, its relations with the
International Monetary Fund, Borrowings
during current political government tenure
and the decisions regarding recent
depreciation in the local currency. This
newsletter is created primarily based on the
information available in the Newspapers,
websites and electronic media for public.
Pakistan IMF Loan Program
Pakistan is one of those countries that have
frequently approached the IMF for standby
loans, adjustment facility (adjustment lending)
and Economic stabilization packages. The
loans of the IMF accompanied a structural
package, requiring Pakistan to meet certain
targets for economic stabilization. In several
cases, the country was required to meet
certain performance parameters before
sanctioning of the loan. The Fund extended its
first standby loan to Pakistan in 1958 but
association between Pakistan and IMF
deepened in 1988, when loan of US$516
Million was extended to Pakistan. It was the
largest loan advanced by the Fund to any
country under this Facility. It was a “soft loan
but with hard adjustment” as interest rate was
low but conditions attached were stringent.
IMF Loan Conditions
Under the IMF arrangement, when a member
country borrows money from the Fund, its
policies come under closer scrutiny.
IMF packages normally included the following:
1- Fiscal austerity (contract in public deficit,
borrowing less from central bank, cuts in state
spending, public improvement and social
service programs, and higher prices for
products supplied by public enterprises)
2- Devaluation of currency
3- Control of inflation through monetary
tightness (restrictions on credit to the public
sector, reducing private credit, and interest
rate increase)
4- Market oriented policies like reducing
state interventions in domestic markets,
lowering trade barriers, cut in real wages,
removing restrictions on exchange controls,
and price incentives for exporters
5- Income policies like wage restraint,
abolishing of subsidies and transfer programs,
and export promotion etc.
Every program for Pakistan invariably
contained the above policy prescriptions
(sometimes with slight variations).
NEWSLETTER
Pakistan
Currency
Devaluation
International Monetary Fund
The International Monetary Fund (IMF) is an
international organization headquartered in
Washington, D.C., of "189 countries working to
foster global monetary cooperation, secure
financial stability, facilitate international trade,
promote high employment and sustainable
economic growth, and reduce poverty around the
world.
It came into formal existence in 1945 with 29
member countries and the goal of reconstructing
the international payment system. It now plays a
central role in the management of balance of
payments difficulties and international financial
crises. Countries contribute funds to a pool
through a quota system from which countries
experiencing balance of payments problems can
borrow money. As of 2016, the fund had SDR477
billion (about $668 billion).
Editor:
Mustafa Kamal
Policy Researher
Email: Caringpk@yahoo.com

2. PAKISTAN CURRENCY DEVALUATION | December 2017 3
Pakistan Total External Debt
External Debt in Pakistan increased to 82981 USD
Million in the second quarter of 2017 from 75747
USD Million in the first quarter of 2017. External
Debt in Pakistan averaged 52111.99 USD Million
from 2002 until 2017, reaching an all-time high of
82981 USD Million in the second quarter of 2017 and
a record low of 33172 USD Million in the third
quarter of 2004.
FAST FACTS IMF Borrowings Overview
The ruling Political Government obtained a
whopping $35 billion in new loans during his
four-year tenure to repay maturing debt and
keep official foreign currency reserves at a level
which could give a sense of economic stability to
investors.
About $17 billion or nearly half of the total loans
obtained from July 2013 to June 2017 were
utilized to repay the previous debt. The
government added net $18 billion to the
country’s total external debt and liabilities – the
highest amount added by any government
during its tenure.
From July 2013 to June 2017, Pakistan’s total
external debt grew by 30% to $79.2 billion,
according to an International Monetary Fund
(IMF). Out of this, external public debt was
about $62.3 billion – also up by 28% compared
with the figure four years ago.
The maximum number of loans – amounting to
$10.1 billion, the highest taken out in any single
year during the country’s 70-year history – was
obtained during the last year of current
government.
In 2013-14, the net increase in the external debt
was roughly $3 billion. Similarly, in 2014-15, the
net increase in debt was $4.42 billion, higher by
53% over the increase reported in the preceding
year. There was a net addition of $5.6 billion in
the country’s external debt during the fiscal year
2015-16, showing a growth of 28.2% over the
increase in foreign debt in 2014-15, according to
the finance ministry.
During the fiscal year 2016-17, the last
government had borrowed $10.1 billion and out
of which it returned about $5 billion loans.
As of June 2017, Pakistan owed $6.109 billion to
the IMF which it has to repay over six years,
starting from 2018. The repayments will peak in
2021 when Pakistan will return over $1 billion.
The latest IMF report on Pakistan shows the
country’s external debt at $79.2 billion by June
2017.
IMF Recommendations about CPEC
As the overall size of the China-Pakistan
Economic Corridor (CPEC) projects grows to
$60 billion, the International Monetary Fund
(IMF) cautioned Pakistan to be mindful about
the adverse implications of repayments of
loans and profit repatriations to China.
The IMF expressed these concerns about the
Pakistan’s ability to repay its $6.1 billion
outstanding loans to the IMF fund during their
meetings with the officials of the Ministry of
Planning & Development and the Ministry of
Finance on December 7, 2017.
The IMF delegation was horrified at the
implications of the $60 billion portfolio of
CPEC. Its main concern was that Pakistan’s
repayment capacity will remain weak, as the
global lender does not see any major increase
in exports in the near future due to a strong
rupee against the US dollar.
The IMF team is of the view that there will be
pressure on balance of payments due to the
CPEC-related outflows.
The IMF team said that due to an overvalued
rupee, exports would not see major increase
and direct impacts on external balance are
expected to be substantial due to CPEC-related
outflows of loans repayments, profit
repatriation and the cost of imported fuel for
power plants being set up under CPEC.
IMF also underscored that over the longer
term, Pakistan would need to manage
increasing CPEC-related outflows.
The size of repatriation would also depend on
the timing of project completion and the terms
of the power purchase agreement.
The IMF also said due to increasing
government and CPEC-related external
repayment obligations, external financing
needs are projected to increase to nearly 7.5%
of GDP over the medium term, highlighting the
need for macroeconomic and structural
policies supporting competitiveness.
It said strong and sustained reform efforts
aimed at raising exports by improving
competitiveness and the business climate will
be critical to maintaining long-term external
sustainability.

3. PAKISTAN CURRENCY DEVALUATION | December 2017 4
RUPEE DEVALUATION
IMF Post-Program Monitoring Meeting
Pakistan and the International Monetary Fund
(IMF) began their post-programme
monitoring talks on December 06, 2017 to
gauge Pakistan’s capacity to repay the $6.2
billion loan amid a rigid exchange rate policy
that is eating up precious foreign currency
reserves.
The current IMF PPM is taking place after a
gap of over 3 years, reflecting improved
security conditions as well as the economic
performance of the country and growing trust
of the international community.
The meeting would continue for about 10
days in which the IMF would highlight risks to
the country’s medium-term economic
viability and give advice on avoiding looming
dangers to make sure that Pakistan repays its
debt.
The Post Programme Monitoring (PPM) is an
important part of the Fund’s safeguards’
architecture focusing on members with
significant outstanding Fund credit or
heightened vulnerabilities that are no longer
in a programme relationship with the Fund,
according to the IMF’s PPM guidelines.
The PPM’s goal is to identify risks to medium-
term viability, provide early warnings on risks
to the Fund’s balance sheets, and deliver
advice that will assist the member country to
repay the Fund.
IMF Current Standpoint
As of June 2017, Pakistan owed $6.109 billion
to the IMF which it has to repay over six years,
starting from 2018. The repayments will peak
in 2021 when Pakistan will return over $1
billion.
After the end of the $6.2 billion IMF
programme in September last year,
Pakistan’s external account has declined at a
rapid pace, exposing the hollowness of
reforms under the three-year IMF
programme. The current account deficit has
already widened to over $5 billion during the
first four months of this fiscal, which is more
than double the previous year’s level.
The State Bank of Pakistan’s (SBP) official
foreign currency reserves slid to $13.54 billion
-down by $5 billion since the expiry of the IMF
programme. The central bank used a
significant chunk of $5 billion in defending the
overvalued Pak rupee. This will be one of the
contentious issues between Pakistan and the
IMF during the ten-day long talks.
The rapid decline of the external account has
also put the current IMF team in an awkward
position.
Discussion on Currency Devaluation
IMF said that Pakistan’s real effective exchange
rate is overvalued by almost 10% to 20 % and
sought “greater exchange rate flexibility, fiscal
adjustment, and structural reforms” to correct
the imbalance and push the case for
devaluation of Pakistani rupee against the US
dollar to curb external sector challenges.
A senior official told that the State Bank of
Pakistan (SBP) would now let the currency
exchange rate to adjust to market conditions
after many months, rather years, of resisting
expectations.
This calculated move allowed the currency rate
to touch Rs110 to a dollar on Friday before
settling down at around Rs107 and did not go
beyond official estimates.
State Bank of Pakistan then announced the
closing rate at Rs107 which was higher than the
market’s closing rate and indicated that the
market will resume its trading at Rs107. This
means a devaluation of 1.5 per cent was
officially confirmed. It further stated that If the
devaluation could not work to boost exports,
demand for further devaluation will be raised.
Historical Experiences of
Devaluation
There was a similar situation in 2007-08, when
the economy was in serious difficulty and our
foreign reserves plunged to $3.4 billion (enough
to cover just one month’s imports).
At the time the government obliged by
devaluing the currency by 28 per cent and
raising import duties on a large number of
products by 15-50pc.
But such measures failed to increase exports or
improve the balance of payments. Despite these
measures, the then government had to seek a
$7.6bn loan from the IMF.
While the IMF loan solved the balance-of-
payments problem temporarily, the economy
that was growing at over six to seven per cent
prior to 2007 plunged to one of the lowest
growth rates and stayed that way for a number
of years.
Devaluation resulted in huge new debts and the
new import duties pulled down exports. As a
result, the country was pushed back several
years.
Currency
1 USD = 107.5 PKR (Oct 2017)
GDP $1.060 Trillion (PPP, 2017)
GDP growth
5.28%
GDP per capita
$1,629 (nominal)
GDP by sector • agriculture: 19.53%
• industry: 20.88%
• services: 59.59% (2017 est.)
Inflation (CPI) • General : 4.0%
• Food : 2.4%
• Non Food: 5.1 (Nov 2017)
Population
below poverty line
39% (2016)
Labor force
61.04 million (2015–16)
Labor force by
occupation
• agriculture: 42.3%
• services: 35.1%
• industry: 22.6%
Unemployment 5.9% (2015)
Ease-of-doing
business rank
147/190 (2018)
Exports $21.938 billion (FY 2017)
Imports $48.506 billion (FY 2017)
Public debt
61.7% of GDP (June 2017)
Revenues 15.5% of GDP, Pkr 4936.7 Billion
or $47 billion(FY 2017)
Expenses 21.3% of GDP, Pkr 6800.5 Billion
or $65 billion(FY 2017)
Foreign reserves • SBP: $13.9 Billion
• Scheduled Banks: $5.9 Billion
• Total : $19.8 Bil (Sep 17)
FAST FACTS

4. PAKISTAN CURRENCY DEVALUATION | December 2017 5
Possible outcomes of
Devaluation
There are many reasons why devaluation and
raising tariffs have been harmful to Pakistan’s
economic development in the past. Some of
these are summarized below.
A.
The country’s imports are inelastic and a
weaker devalue rupee will not help. Mostly,
they consist of raw materials (petroleum,
chemicals and metals), intermediate goods or
machinery. Any devaluation would increase
their cost and thus make Pakistani exporters
less competitive.
B.
Devaluation will raise the cost of servicing our
external debt. Currently it is estimated to be
around $70bn. If the rupee declines by 25pc,
so will the external debt in local currency.
According to government figures, devaluation
of rupee during 2008 to 2013 caused the debt
to swell by Rs1.909 trillion in local currency.
Thus, devaluation instead of easing the
balance of payments will further exacerbate
it.
C.
Devaluation always increases inflation as
essential items such as petroleum, food and
chemicals constitute almost half of our total
imports. When general elections 2018 are
near and there is already so much instability,
the government will not afford to make life
more difficult for the poor and the middle
class.
D.
it has taken Pakistan almost 10 years to
rebuild investor confidence to an extent.
International investors are gradually making a
comeback. Their investment in the local stock
exchange reached a 15-month high last week.
After a long period of decline, exports have
started inching up. The recent State Bank
survey shows that the Consumer Confidence
Index has risen by 5.07pc compared to the
previous survey conducted in July. If the
currency is devalued, it would send a negative
signal to potential investors.
Pakistan Foreign Reserves
The foreign currency reserves held by State
Bank of Pakistan (SBP) stand in the range of
$15 billion after $2.5 billion were received
through bonds in the first week of December
2017.
As of November 2017, the State Bank of
Pakistan’s official foreign currency reserves
were $12.66 billion including $5.8 billion
worth of currency swaps and forward
contracts. Despite showing $5.8 billion as part
of its own reserves, the SBP has also included
the same amount in the total $6.01 billion
reserves held by commercial banks.
By excluding $5.8 billion of short-term loans,
the net usable reserves with the commercial
banks stand at only $200 million. Out of $5.8
billion loan, $1.68 billion was obtained for one
month, $2.46 billion for up to three months
and $1.7 billion for up to one year, according
to the SBP.
According to financial analysts, the net
foreign currency reserves of the central bank
would stand close to $4.5 billion even after
including $2.5 billion that Pakistan borrowed
last month from international debt markets.
The $5.8 billion amount has to be excluded
from the SBP’s gross official reserves of $15.1
billion, which will bring down the reserves to
$9.3 billion. Then another $4.8 billion have to
be excluded on account of repayment of
external debt in the coming months.
Pakistan Trade Deficit
The country’s trade deficit was recorded
at $15 billion during five months (July to
November) of the current fiscal year as
compared to $11.7 billion of the same
period of last year, showing an increase
of 28.6 percent. Trade deficit is widening
due to higher growth in imports as
against the exports of the country.
The CAD is widening as higher imports
growth offset the improvement in
exports. The current account deficit is
likely to touch $18 billion by the end of
current fiscal year, which would further
pressurize the reserves
Pakistan Exports
Pakistan’s exports were recorded at $9
billion during July-November of the year
2017-18 as compared to $8.2 billion of
the corresponding period of the last
year, showing a growth of 10.49 percent.
Meanwhile, the imports showed double
growth than exports, as they went up by
21.1 percent and were recorded at $24.1
billion during first five months of the
current financial year as against $19.9
billion of the same period last year.
FAST FACTS