Pakistan’s currency suffered its worst week in more than two decades, reflecting investor concerns that the country risks following Sri Lanka to become the next emerging economy to default on foreign repayments.
The 7.6% fall in the Pakistani rupee to Rs 228 to the dollar marked the latest setback for the currency, which has fallen sharply this year. This is the biggest weekly drop in the rupee since October 1998.
The latest slide reflects growing concerns that a $1.2 billion IMF loan disbursement agreed last week may not be enough to avert a balance of payments crisis. Pakistani bonds have been among the worst performers in emerging markets this year.
Sri Lanka’s economic collapse and default on its external debt in May led to a full-scale political crisis last week, forcing then-president Gotabaya Rajapaksa to flee mass protests to the ‘exile.
The country’s fall was one of the most stark manifestations to date of broader fragility in emerging markets, which are bearing the brunt of greater risk aversion among investors and rising commodity prices. commodities and interest rates.
However, Pakistan’s larger population, strategic location and nuclear weapon status mean a financial crisis there would have more serious implications, analysts said.
“The international fallout from Pakistan’s internal collapse would be far greater than in Sri Lanka,” said Hasan Askari Rizvi, a Pakistani national affairs and security commentator. “I think there’s a lot out there [powers] who would like to avoid an outright disaster in Pakistan created by an economic collapse.
Fitch Ratings this week lowered its national outlook to negative from stable, noting what it called a “significant deterioration in Pakistan’s external liquidity position and financing conditions” this year.
The rating agency said central bank foreign exchange reserves had fallen to around $10 billion in June 2022, down from $16 billion a year earlier and equivalent to just over a month of current external payments. .
Pakistan’s central bank raised its main key interest rate by 125 basis points to 15% on July 7 in a bid to stem demand for foreign currency and reduce inflation.
As in Sri Lanka, Pakistan’s growing financial distress has political repercussions. To meet the terms of a $6 billion loan package agreed with the IMF in 2019, Prime Minister Shehbaz Sharif’s government withdrew fuel and energy subsidies, causing prices to spike. Subsidy withdrawals added to the impact of world market price increases caused by the war in Ukraine.
Public anger over soaring prices has already fueled an electoral upheaval. On Sunday, voters in Punjab province, Pakistan’s most populous region, gave victory to the party of former Prime Minister Imran Khan, ousted in April. Khan called for a snap election this week and said on Wednesday that Pakistan was teetering towards “economic collapse”.
“We expect political risk and political volatility to remain quite elevated heading into the upcoming elections,” said Moody’s analyst Grace Lim, which downgraded its outlook for Pakistan to negative last month. In a research note last week, the credit agency said the country’s ability to complete its current IMF program “remains highly uncertain.”