KARACHI: Moody’s Investors Service said on Tuesday the rupee will likely face ongoing depreciation pressures against the dollar after a five per cent downward adjustment last month.
If the rupee depreciates markedly further, the State Bank of Pakistan (SBP) will find it difficult to keep inflation under control, it added.
However, Moody’s said if the depreciation is limited to 5pc, the weakening of the rupee will pose no significant credit implications for the sovereign.
“Given the likely evolution of the current account, further depreciation pressures are likely.
“In particular, Moody’s expects Pakistan’s current account deficit to remain around current levels, at 3-4pc of GDP, due to the high import intensity of domestically driven growth,” said Moody’s.
It pointed out that around one-third of government debt is denominated in foreign currency, and further rupee depreciation will increase the country’s debt burden, which was equivalent to 68pc of GDP at the end of 2016-17.
This is higher than the median estimate for B-rated sovereigns of 55pc of GDP for 2017.
If the rupee depreciates markedly further, the country’s central bank will face the difficult challenge of anchoring inflation expectations at moderate levels.
It said that allowing the rupee to reflect currency fundamentals over the longer term will reduce the drain on foreign exchange reserves and enhance the sovereign’s capacity to absorb shocks to trade or capital flows.
Moreover, if inflation expectations are anchored and the government’s liquidity risks do not rise sharply, currency flexibility will also enhance the country’s price competitiveness given the current overvaluation of the rupee, it added.
Courtesy-Dawn, January 10th, 2018