Fitch expects Pakistan rupee to average Rs171.15/USD in 2021

KARACHI: Fitch Solutions forecast rupee to average 171.15 versus the US dollar next year as soft demand for Pakistani assets by foreign investors will continue to cool demand for the local currency.

Fitch Solutions said rupee weakened around 7.1 percent against the US dollar year-to-date.

“Over the long-term, we forecast the Pakistani rupee to average weaker at Rs171.15/USD in 2021 due to higher structural inflation vis-à-vis the US,” it said in the latest currency roundup report. “We forecast the unit to continue to trade weaker, forecasting the rupee to average Rs163/USD in 2020,”

Concerns over the country’s debt sustainability caused rupee to underperform, according to the Fitch.

Public debt has already crossed Rs34.5 trillion, up 8.5 percent compared with Rs31.8 trillion recorded at June-end 2019. The government relies on borrowing due to poor revenue collection and overrun in current expenditures that put intense pressure on fiscal accounts and caused a sharp increase in fiscal deficit in recent years.

Budget deficit was estimated at 9.1 percent of gross domestic product (GDP) for the last fiscal year. However, many analysts believed that the deficit would be between 9-10 percent of GDP in FY2020. The deficit increased to 8.9 percent of GDP in FY2019 compared with 6.6 percent a year earlier.

Now, the government set an ambitious fiscal deficit target of 7 percent of GDP for FY2021 and a primary deficit of 0.5 percent of GDP.

“We see risks from Pakistan’s fiscal position and an overshooting of its fiscal deficit target in FY2020/21,” Fitch Solutions said.

However, Fitch Solutions doesn’t see free-fall in rupee value owing to foreign financing.

“We do not expect a sharper depreciation in the rupee given our expectation for support from international partners, such as the Global-20 countries, which will boost Pakistan’s FX (foreign exchange) reserve base and ease external financing pressures,” it said.

Rupee depreciation is also seen as a stimulus to keep up foreign exchange reserves as it boosts export competitiveness and discourage imports.

In Pakistan’s case, rupee devaluation could not help in increasing exports. However, it brought imports down. Exports declined 6.8 percent to $21.3 billion during the last fiscal year, whereas imports sharply fell 18.6 percent to $44.5 billion.

“Policymakers (in Pakistan) will likely allow for some depreciation, given lower oil prices should cap inflationary pressures,” Fitch Solutions said.

Fitch Solutions said COVID-19 continues to progress rapidly in the largest countries in the region such as India, Indonesia, Pakistan and the Philippines. “Despite facing challenges resulting from the spread of the virus, the Philippine peso has proved an outperformer in the year-to-date due to the sharp improvement in the current account balance, low foreign participation in its bond market (preventing a sharp sell-off in March, as opposed to the Indonesian rupiah) and a relatively cautious approach to monetary stimulus.”