SBP will be required to withdraw the condition that all interbank deals be backed by approved commercial transactions. This condition had been introduced to maintain the value of the rupee. End-July 2000, SBP had to lift the cap from the interbank rate following the IMF'S objections about keeping the rupee overvalued. The value of the rupee declined by 12 per cent between its mid-May level and October 25's and before Pakistan could qualify for minimal IMF's assistance. A tight monetary policy is now advised by the IMF for 2000-1 to keep the rupee stable and to contain inflation.
Rest is theory.
That is, a depreciated rupee's expected favourable impact on trade flows and thereby on the rates of interest. This did not show results in the past despite which it is again expected to sho results now. As for a tight monetary policy's ability to contain the price line, all the administered prices are advised by the IMF to increase. Quarterly review of petroleum prices means an increase every quarter which feeds into all other costs thus creating an upward pressure on prices. The agreement explicitly advises a substantial increase in gas tariffs so as to facilitate privatization in this sector.