Pakistani Rupee to lose further value amid falling foreign reserves
Pakistani Rupee will continue the downward trend not only during 2018 but also in 2019. The Rupee has already lost ten percent (10%) value against dollar in the first three months of this year. The Rupee expected to further depreciate around 12 percent by the end of the next fiscal year of 2019. Pakistan is facing difficult situation to fulfil the rising external financing requirements and widening trade deficit.
Pakistani economic managers need to fix both problems. Pakistan needs to increase exports and bring down the imports to control the unprecedented level of trade deficit. Pakistani exports fallen in last couple of years while the imports have increased. Meanwhile the fall in the foreign reserves continued throughout the fiscal year 2017-18. The reserves fall from 20 billion dollars to 12 billion dollars. It could fall further after the repayments to international donors and institutions.
In this situation, Pakistan has only two choices or options. One is to go back to IMF and World Bank to seek new loans to bridge the gap. The other is to seek financial help from friendly countries like Saudi Arabia, China and Turkey to fulfil financial obligations.
According to the assessment of leading brokerage house Alfalah Securities, the Rupee will lose five percent value during this year. They said the following in their economic assessment and prediction,
“We expect a further depreciation of around 5 percent in rupee/dollar value by the second half of 2018 followed by approximately 5 to 7 percent devaluation during 2018/19. We expect further market-driven downward adjustment of the exchange rate in response to depletion of forex reserves, with the magnitude and duration of rupee weakness depending on when Pakistan signs up to a (International Monetary) Fund program – or manages to arrange foreign exchange reserves- bolstering hard currency from alternate sources.”
The brokerage said the country’s external financing requirements would increase in the medium-term as large energy import requirements displace China-Pakistan Economic Corridor -related machinery imports, and as “a hump in debt repayments kick in”.
“The gross external financing requirement is on target to be around $25 billion for the full year,” it added. “The unfunded portion of the overall external gap is estimated to be around $12 billion for the current fiscal year, which could represent a drawdown of official reserves if it remains unfinanced.”
Alfalah Securities said the unsustainable external financing requirements on the horizon mean that the rupee would begin to experience volatility as well as pressure again within a few months.
“The depletion of foreign exchange reserves continued with the country’s international liquidity having declined a cumulative $7.1 billion in the past 12 months or by 38 percent.”
The brokerage said the pressure on the balance of payments position has continued to mount despite a noticeable turnaround in the country’s exports since early 2017. “With large net external financing needs persisting over the next three years, the forex reserves loss is expected to continue, requiring an IMF (International Monetary Fund) loan arrangement (or an alternate financing source) by the summer.”
Current account deficit rises 50 percent to $10.8 billion for the July-February period of the current fiscal year.
Alfalah Securities said the dynamic of Pakistan-US relations could at some stage, depending on how much ‘pain’ the US administration wants to bring to bear, hamper the country’s access to multilateral financing, including from the IMF.
The present government is not keen to rush to the IMF or World Bank when it just few weeks away from completing its five year term. The PML-N government is not in the position to accept the conditions of IMF when elections are around the corner.
So the interim government will be forced to make hard choices. If the interim government decided to leave it to the next government then the next elected government will not be able to enjoy even the honeymoon period.
First published in acenews.com.pk on 05-04-18