Fitch forecasts Pakistani rupee to average Rs.171.15/USD in 2021

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

Fitch Solutions, a UK-based macro intelligence provider, said the rupee weakened around 7.1% 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,”

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

Public debt has already crossed Rs34.5 trillion, up 8.5% compared with Rs31.8 trillion recorded at June-end 2019. The government relies on borrowing due to reduced 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.

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

Now, the government set an ambitious fiscal deficit target of 7% of GDP for FY2021 and a primary deficit of 0.5% 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 G20 countries, which will boost Pakistan’s foreign exchange reserve base and ease external financing pressures,” it said.

Rupee depreciation is also seen as a boost to keep up foreign exchange reserves as it enhances export competitiveness and discourages imports.

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

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

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