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ISLAMABAD: Fitch Ratings has revised downward its forecasts for the Pakistani rupee, ie, from Rs165 to Rs180 for 2022 on account of the worsening terms of trade, tighter US monetary policy, alongside the flow of USD out of Pakistan and into Afghanistan.

The rating agency has also revised its forecast for the Pakistani rupee to average Rs164/USD in 2021, down from Rs158/USD previously.

In short-term outlook (three-to-six months), since its last update in June 2021, the Pakistani rupee (PKR) has depreciated by 7.1 percent to Rs169.31/USD and the rupee has averaged Rs159.23/USD over the first nine months of 2021. The sell-off can largely be attributed to the country’s increasing import bills, alongside external factors stemming from neighbouring Afghanistan. These factors are expected to continue exerting a depreciatory pressure on the rupee, it added.

The rating agency further stated that from a technical perspective, it sees scope for further depreciation of the rupee against the US dollar.

Rupee's decline continues, hits new low against dollar

The unit continues to be above both long- and short-term moving averages, suggesting a deprecatory trend over the medium term.

“From a fundamental perspective, the currency is expected to weaken due to worsening terms of trade on the back of higher oil prices. On average, the country’s trade deficit has been widened on a year-on-year basis this year coming in at -USD2.9billion vs -USD1.7billion across the same period in 2020. This comes as oil prices averaged USD67.68/bbl year-to-date compared to USD43.20/bbl in 2020. We expect this trend of strong oil prices to persist as our Commodities team forecast Brent crude oil prices to average USD70/bbl in 2021. With oil accounting for a large share of Pakistan imports (20.1 percent of total imports), an increase in oil prices over 2021 will worsen Pakistan’s terms of trade, thereby weighing on the PKR over the coming months”, it added. The agency further stated that they do not expect the State Bank of Pakistan (SBP)’s monetary tightening cycle over the coming months to be sufficient in offsetting the strengthening pressures on the US dollar.

The Federal Reserve has signaled its intention to begin tapering asset purchases over the coming months due to progress made on the improvement of the US labour market as well as growing inflationary pressures domestically.

A new low for Pakistan's rupee

Combined with some members of the Federal Open Market Committee (FOMC) bringing forward their expectations for the start of the US rate hiking cycle to 2022 from 2023 previously, representing a hawkish shift by the FOMC, this will likely put upside risks to US dollar strength over the coming months.

While the SBP will also be tightening monetary policy – we forecast 100bps of hikes to the policy interest rate by June 2022 – persistently high risks regarding the country’s assets due to Pakistan’s twin deficit status inform our view that this will fall short in offsetting the rupee’s depreciation against the USD.

Greater transfer of USD from Pakistan to Afghanistan will also weigh on the Pakistani rupee.

International assistance to Afghanistan has dried up since the Taliban’s takeover of the country and with Afghanistan’s foreign currency reserves held in the US being frozen, there is an ongoing shortage of USD in Afghanistan. Amid the USD shortage in Afghanistan, Afghan families and businesses residing in Pakistan have converted a greater proportion of their rupees to dollars to be remitted to Afghanistan.

Copyright Business Recorder, 2021

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