By Staff Reporter
KARACHI: Fitch Solutions on Tuesday forecast that Pakistan’s currency would depreciate further, particularly with the country’s balance of payments position that is likely to remain weak for several more months.
In its latest forecast for Pakistan, Fitch said its earlier forecast of the dollar rising to Rs248 is “now looking out of date.”
“We believe that the rupee’s weakness still has further to run, particularly with Pakistan’s balance of payments position likely to remain weak for several more months,” Fitch said.
The rating agency said currently there is “a considerable amount of uncertainty” at this juncture, adding that it is difficult to gauge the extent to which the latest rupee devaluation has caused investor confidence to dip.
“We will; therefore, firm up our rupee forecasts over the coming weeks, once the dust settles.”
It said a weakening rupee would also have broader economic implications in the near future. “In the near term, it could exacerbate imported inflationary pressure, and may eventually result in steeper policy rate hikes from the SOP (State Bank of Pakistan),” Fitch added.
While it said that Pakistan’s economy was expected to contract by 0.3 percent in FY2022/23, the rupee’s devaluation would help Pakistan secure further disbursements from the IMF. Fitch said it would be “a positive for the longer-term outlook,” helping Islamabad ease its balance of payments strains.
The rupee plummeted to a record 24-year low last week after foreign exchange companies removed the cap on the exchange rate. The move was a bid to revive a stalled $7 billion International Monetary Fund (IMF) loan program, Pakistan agreed to remove artificial controls from its exchange market.
The removal of the currency cap has been one of the principal demands of the IMF. Pakistan, with a staggering $3.6 billion in reserves barely enough to cover three weeks of imports, is actively seeking an IMF bailout program to avoid a balance-of-payments crisis.
An IMF mission is currently in Islamabad till February 9, 2023, to discuss the loan revival.
“The rating agency said one condition under the IMF’s External Fund Facility agreement is for Pakistan to move towards an exchange rate regime that is determined by market forces.
The rupee’s devaluation was triggered by the decision among local foreign exchange companies to remove the self-imposed cap on the exchange rate on January 25. The SBP initially intervened, but the significant depreciation in the rupee is a clear sign the authorities have effectively loosened their grip on the currency.”
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