Moody’s Investors Service on Tuesday expressed fears for the Pakistani rupee depreciating further against the US dollar but hopes that the depreciation will bring long-term benefits for the Pakistani currency.
“Over the longer term, allowing the PKR to reflect currency fundamentals would reduce the drain on Pakistan’s foreign exchange reserves and enhance the sovereign’s capacity to absorb shocks to trade and/or capital flows. Moreover, if inflation expectations are anchored and the government’s liquidity risks do not rise sharply, currency flexibility would also enhance Pakistan’s price competitiveness, given the current overvaluation of the PKR”, Moody’s said in its announcement.
The credit rating firm observed that ‘PKR depreciated around 5% (to reach over Rs110) against the USD, with most of the weakening occurring over three trading days between 8 and 12 December 2017’.
Citing the real problem behind the currency depreciation, Moody’s said that 33% of Pakistan’s debt was in foreign currency and that the debt burden was 68% of the GDP at the end of the previous fiscal year while it should be 55% for the B-rated sovereigns.
It said that at the current levels, Pakistan’s credit rating was not likely to be hit but further depreciation was certainly possible; and likely as well. It hoped that ‘Pakistan’s current account deficit to remain around current levels, at 3%-4% of GDP, due to the high import intensity of domestically-driven growth’.
In a related note, Commerce Secretary Younus Dagha said on Tuesday that exports have increased during the five months of the ongoing fiscal year, and are set to go further north after the central bank allowed free-market dynamics to determine the rupee’s value to the dollar last month.
Pakistan’s exports have registered 11% increase so far, a development that came on back of the rupee losing value against the US dollar. However, some key sectors with export potential have seen falling production in the current fiscal year, including leather, engineering products, and chemical sectors.
The business community feels that first, Pakistan will need to improve its performance on all indicators of doing business index, which currently ranks Pakistan at 147 out of 190 countries. Second, a key contributor to this declining rank has been the inability to reform national and provincial tax regime across the country.
According to some experts, Rupee may further devalue in months ahead in the range of 115 and 120 against US dollar.