The Pakistani rupee fell by 1.2% on Wednesday after foreign exchange companies removed a cap on the currency, saying it was creating "artificial" distortions in the market as the South Asian country struggles to escape a deepening economic crisis.
Pakistan is battling to meet its external financing obligations in the face of rapidly dwindling foreign exchange reserves that are barely enough to cover a month of imports. It is also beset by decades-high inflation which policymakers are trying to curb with massive interest rate hikes.
The rupee was bid at 240.60 to the U.S. dollar and offered at 243 in early trade, the Exchange Companies Association of Pakistan said in a statement, compared with a range of 237.75/240 at the close on Tuesday.
The rupee has depreciated 11.23% against the greenback so far in the current fiscal year 2022-23, which ends on June 30.
The exchange association said late on Tuesday it was lifting the cap on the currency in the interest of the country.
"We have decided that we bring the exchange rate at par what we are supplying to the banks against credit cards," Secretary General Zafar Paracha said in a statement, adding that level is 255/256 rupees to the dollar.
Before the cap on the rupee was removed, markets eyed three different rates to assess its value -- the state bank's official rate, the one assessed by the foreign exchange companies and the black market rate.
"Though the bank rate for today is yet not been disclosed, we think the dollar rate in banks may fall by up to 5% in few days," said Mohammed Sohail, chief executive officer at brokerage Topline Securities.
Participants in the stock market think the removal of the cap may be a step towards liberalise the exchange market which will help the country unlock stalled IMF funding, Sohail said.
The International Monetary Fund is yet to approve its ninth review to release $1.1 billion, which was originally due to be disbursed in November last year, but got held up over fiscal consolidation issues.
The IMF has called for fiscal steps to reduce the budget deficit that include subsidy cuts, slashing energy sector debt, levying more taxes to plug the revenue shortfall, and a market-based exchange rate as conditions for releasing the funding.
Pakistan's Prime Minister Shehbaz Sharif said on Tuesday that his country was willing to discuss all of the IMF's demands.
(Writing and reporting by Asif Shahzad in Islamabad; Editing by Kim Coghill)