KARACHI: The odds of Pakistan facing a currency crisis in the next 12 months now exceed 50 percent following floods that killed thousands of people and displaced millions more, a Bloomberg Economics risk model showed.
The probability of a currency-crisis episode involving a very large depreciation of the nominal exchange rate and extensive depletion of foreign-exchange reserves could climb to about 59 percent by June 2023 from 29 percent in August, economist Ankur Shukla wrote in a note.
Shukla used a currency risk model initially applied to Pakistan but will be expanded to other emerging markets.
“Crop damage and a host of other problems stemming from the disaster all but erase any progress toward stability that came with the IMF’s aid,” Shukla wrote in a note on Tuesday. “Much of the progress toward stabilizing external balances has been undone by the floods.”
The country secured a $1.1 billion loan from the International Monetary Fund in late August to avert an imminent default, but the deadly flooding wrought damages of about $30 billion. Islamabad has made an urgent appeal for debt relief from rich nations.
For returning Finance
Minister Ishaq Dar, who’s a
known advocate of a stronger currency, the rupee will strengthen to its fair value which is below 200 per dollar.
The currency has plunged about 20 percent this year as the nation’s finances worsened. Pakistan’s optimism since the IMF loan has faded, with dollar bonds dropping to a record low.
The nation that has seen swathes of agricultural land and multiple crops damaged is anticipated to spend $3 billion on buying cotton as small factories shut down from a shortage.
The burden comes at a time the nation has restricted imports to reduce its trade deficit.
Floods will widen the current-account deficit because of higher food imports and a hit to exports, said Shukla.