Fitch Solutions says rupee to ‘weaken further in coming months’

KARACHI: Fitch solutions on Tuesday said Pakistan rupee’s weakness still has further to run in coming months on the country’s weak balance of payments position.

The rupee witnessed a record low of Rs269.63 against the dollar after the currency was left to be determined by the market, one of the conditions of the International Monetary Fund (IMF). The local currency took a breather on Tuesday as resumed talks with the IMF revived the market confidence.

However, the New York-based research agency believes that the rupee to fall further against the dollar and depreciation of the currency to leave broader economic implications for the country.

“We believe that the rupee’s weakness still has further to run particularly with Pakistan’s balance of payments positions likely to remain weak for several more months,” it noted, adding, “there remains a considerable amount of uncertainty at this juncture.”

The agency added that it was difficult to gauge the extent to which the latest devaluation had caused investor sentiment to further sour. “We will therefore firm up our rupee forecasts over the coming weeks, once the dust settles.”

Fitch Solutions warned that a continued weakening in the rupee would have broader economic implications too.

In the near term, it would exacerbate imported inflationary pressure, and may eventually result in steeper policy rate hikes from the State Bank of Pakistan, according to the agency.

“These factors would only exacerbate Pakistan's challenging economic outlook. We currently expect the economy to contract by 0.3 percent in FY2022/23.”

Equally however, it added, the rupee's devaluation would help the country with securing further disbursements from the IMF, which would be a positive for the longer-term outlook as it would help ease its balance of payments strains.

One condition under the IMF's External Fund Facility agreement was for Pakistan to move towards an exchange rate regime that is determined by market forces.

The rupee was devalued on January 26, dropping significantly by 8.3 percent against the dollar on the day itself.

The currency has weakened by over 5.0 percent since then, to all time highs of around PKR269.63 a dollar on January 30.

The devaluation was triggered by a decision among local foreign exchange companies to remove a self-imposed cap on the exchange rate on January 25.

The SBP initially intervened, but a significant depreciation in the rupee is a clear sign that the authorities have effectively loosened their grip on the currency, according to the agency.