Four things to know about the Pakistani rupee

What?

The rupee rose slightly to 98.38 against the dollar last week from its prior week’s close of 98.43. It has been trending lower over the past year against the dollar, falling by a little over eight per cent. This has put pressure on returns for foreign investors as they transfer capital back to their home country and on importers into Pakistan as goods purchased internationally increase in cost due to the currency depreciation.

Why?

Given the completion of the recent election last week concerns over political uncertainty should diminish. But the risk of high debt and diminishing foreign exchange reserves as payments are is a cause for investor concern. The government is having a difficult time keeping enough dollar reserves on hand given low inflows of foreign capital into the country. In addition, the government’s fiscal deficit is a cause for concern.

What next?

Last week and subsequent to the election Moody’s announced they were retaining their negative outlook on Pakistan’s government debt with a rating only some levels above default. This is likely to keep the country beholden to loans from the IMF as selling additional government bonds becomes too burdensome given that high interest rate that would be required by investors. A multi-billion bailout from the IMF is anticipated within the next six months.

What to do?

For now it looks like the weakening of the rupee relative to the dollar will continue. The market will be watching for significant reforms by the new government over the next few months. In addition to high debt service costs and low foreign exchange reserves, the economy of Pakistan is struggling with energy shortages and a fiscal deficit that needs to be brought down to a manageable level.

- By Bruce Powers, Special to Gulf News