The fear that if prudent and timely economic measures are not taken, Pakistan may spiral out of control, much like Sri Lanka. The Pakistani Rupee (PKR) against the US Dollar (USD) in the interbank recently has continued to depreciate.
In the last few weeks, the PKR witnessed a free fall against the USD, depreciating over 13 percent FY23TD. The political risks and shifting paradigms took a toll on the foreign investors and creditors confidence. On a calendar year-to-date (CYTD) basis, thePKR has lost almost 26 percent of its value against the US dollar.
The Pakistan rupee (PKR) has deprecireciated by more than 5% against the US dollar, mainly due to a surge in international commodity prices and strong domestic demand. The PKR has also depreciated due to widening of the country’s current account deficit.
However, this is expected to come down as a result of measures taken by the authorities to reduce overall aggregate demand.
REER and the Dollar index
The SBP has said that the PKR’s exchange rate against the US dollar fell to 93.57 in May 2022 from 97 in January 2022. A drop in REER is also explained by the 10 percent devaluation in major trading currencies (GBP and EUR) against the USD since 2021.
Globally, the USD has surged by 12 percent in the last six months to a 20-year high.
The report attributes this short-term stability to inflows from bilateral and multilateral creditors and IMF.
Is Pakistan Defaulting?
SBP has reassured that Pakistan’s $33.5 billion external financing needs for the current year (FY23) are fully met, with IMF in place. The report highlights that compared to what Sri Lanka did that led to a complete economic meltdown, SBP has time and again highlighted that the market concerns are ‘unwarranted’.
Unlike Sri Lanka, Pakistan allowed the exchange rate to depreciate as soon as external pressures began. The fear of default is not only limited to the forex market, the bond market yields too, in recent times, have shown panic and concerns of investors.
The yield of Pakistan’s international bonds has gone up significantly since April, especially the ones maturing in Dec 2022 and April 2024. The higher yields also point toward investors expectation of default despite Pakistan signing staff-level agreement for the combined seventh and eighth reviews of EFF with the IMF.
Pakistan might not consider reentering the international capital market in the current situation. The country has two bond maturities till 2024 worth $2 billion, with one maturing in Dec 2022 ($1 billion) and the other one in April 2024 ($1billion).