ISLAMABAD – Moody’s Investor Services has released a report which depictsthat all is not well in Pakistani economy with hints that Pakistani rupeemay decline further against US dollar and the Pakistan Foreign debt istouching the dangerous limits.
Further depreciation in the Pakistani rupee against the US dollar islikely, given the likely evolution of the current account, which wouldraise financing costs and inflation short term, Moody’s Investors Servicewarns in its recently-released reportlink>.
However, over the longer term, allowing the PKR to reflect currencyfundamentals would reduce the drain on Pakistan’s (B3 stable) foreignexchange reserves and enhance the sovereign’s capacity to absorb shocks totrade and/or capital flows, the report states.
The analysis is contained in Moody’s report titled ‘Government of Pakistan- Further currency depreciation would raise financing costs and inflationshort term, enhance competitiveness longer term’.
According to the report, in the short run the country’s central bank willface the difficult challenge of anchoring inflation expectations atmoderate levels and the government’s debt affordability will also likelyweaken further.
However, if inflation expectations are anchored and the government’sliquidity risks do not rise sharply, currency flexibility would enhancePakistan’s price competitiveness in the longer run, given the currentovervaluation of the PKR. Greater exchange rate flexibility would alsoimprove the economy’s shock absorption capacity by incentivizing thereallocation of resources between the tradable and non-tradable sectors ofthe economy.
The PKR depreciated around 5% against the USD, with most of the weakeningoccurring over three trading days between 8 and 12 December 2017, Moody’snotes. The depreciation came on the back of a long period of broadlyunchanged exchange rate, except for a one-day spike in July 2017. Since 12December 2017, the PKR has remained broadly unchanged at these weakerlevels.
Moody’s points out that around one-third of Pakistan’s government debt isdenominated in foreign currency, and further PKR depreciation wouldincrease the country’s debt burden, which was equivalent to 68% of GDP atthe end of fiscal year 2017. This is higher than the median estimate forB-rated sovereigns of 55% of GDP for 2017.