Bank of America says PKR could devalue to Rs340/$

High domestic borrowing, unsustainable debt raise concerns over currency’s stability

KARACHI:

Bank of America (BofA)Securities has predicted that Pakistan’s currency could devalue to Rs340 against the US dollar due to high domestic borrowing, substantial interest payments, and the need to restructure unsustainable debt in 2024 and 2025.

The Pakistani rupee closed at Rs277.41 against the US dollar in the interbank market on Wednesday, according to the State Bank of Pakistan (SBP).

BofA Securities expects inflation to remain high over the next few years, with a projection of 26% in FY24. They also anticipate that Pakistan’s central bank’s key policy rate may rise to 25% in the year, compared to the current rate of 22%.

The report suggests that the economy may grow by 2.5% in the year, falling short of the government’s target of 3.5% for FY24.

The global securities firm stated in its report titled “Pakistan Viewpoint – Running out of ‘orthodox’ options,” dated June 30, 2023, that although they believe the Pakistani rupee may have already reached its fair value at Rs286/$, the high domestic borrowing of Rs2.5 trillion could weaken it by another 15-25% to around Rs340/$.

The securities report has apparently priced in the optimism surrounding the $3 billion new International Monetary Fund (IMF) loan programme.

The research house highlights that Pakistan is facing a severe liquidity crisis in external and domestic debt service, and conventional policies to maintain financial stability are becoming limited. They suggest that a comprehensive reprofiling of bilateral maturities beyond the 2024/2025 fiscal year and a restructuring of commercial debt may be required.

Authorities may be forced to rely on the SBP in the local market, where the liquidity crunch is even more severe. With rising debt servicing costs, the capacity for a further “muddle-through” approach may be limited to short-term political cycle needs.

Debt servicing costs alone for FY23/24 exceed Rs7.3 trillion ($25.6 billion), accounting for half of the total budget spending and approximately 80% of the country’s expected tax revenues, according to the newly released budget parameters.

The report notes that parliamentary elections in the fourth quarter of 2023 may serve as an important timeline for policy actions by the authorities and the evolution of market risks.

Published in The Express Tribune, July 6^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.