The Pakistani rupee dived to an historic low against the US dollar on Thursday after an exchange cap was lifted as Islamabad campaigns to unlock a vital bailout from the IMF.

Pakistan is in dire economic straits, with shrivelling foreign exchange reserves only enough to pay for around three weeks of imports amid an endless effort to service external debt.

The rupee shed 24.11 in the official interbank market on Thursday, falling as low as 255.43 rupees to the dollar, according to multiple sources.

The 9.6 per cent decline of the rupee is the second-biggest drop in a single session, brokerage Topline Securities said. The previous official low of 240 rupees was recorded in July 2022, when Pakistan’s long-struggling economy was further weakened by political chaos and devastating floods.

In 2019, the government of former prime minister Imran Khan brokered a multi-billion dollar loan package from the International Monetary Fund (IMF).

But the economy slid backwards when Khan reneged on his promise to cut subsidies and market interventions that had cushioned the cost-of-living crisis.

Prime Minister Shehbaz Sharif, who ousted Khan in a no-confidence vote last spring, has also been reluctant to meet loan conditions amid falling popularity.

Exchange Companies Association of Pakistan President Zafar Paracha told AFP the cap was lifted on Wednesday “in consultation with the state bank”.

Mohammad Sohail, the CEO of Topline Securities, told AFP: “Inflation is bound to rise further.”

Pakistan is drastically short on forex reserves owing to persistently rising demand for the dollar.

Thousands of shipping containers packed with raw materials for industry, foodstuffs, and medical equipment are being held up at Karachi port because banks have refused to guarantee importers’ dollar transactions.

Pakistan also suffered from a nationwide electricity outage earlier this week, linked to a cost-cutting measure, estimated to have cost the textile industry alone $70 million.

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 Jan. 13 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.

Agencies