The Pakistani rupee has somewhat remained stable against the US dollar, depreciating by a mere 2.4 percent on a year-on-year basis, in the period July-March of FY11. A recent monthly analysis depicts that the rupee appreciated by 0.83 percent MoM in April 2011 against the greenback on the basis of high Pakistani rupee demand.
The rupee rebounded to 85.95 (as of May 31, 2011) and this stability owes to a build up in foreign exchange reserves and an improvement in external accounts. However, future risks imply that the current account may post a larger than expected deficit and foreign exchange reserves may face the heat from rising debt servicing in FY12.
Analysts believe that the rupee is likely to depreciate to 87.58 by June 2012, says a research report of Arif Habib Limited. The country’s external accounts continue to paint a promising picture that is marked by a build up in the country’s foreign exchange reserves, which to date stand at $17.07 billion. This was helped by northward heading remittances and exports, which for the period of July-April FY11 registered a growth of 24 percent YoY and 27 percent YoY, respectively.
Strong domestic demand lead to higher imports and recorded a 13 percent YoY increase. However, record exports and remittances helped in closing the trade deficit at $8.3 billion for the period against $9.3 billion during the same period last year.
The current scenario suggests that the country’s current account deficit is unlikely to exceed $0.5 billion in FY11, compared to $3.9 billion in FY10. However, analysts believe that the decline in cotton and other textile prices would exert pressure on exports.
Immense domestic demand, on the other hand will continue to swell the imports bill. With a 6 months or 25 weeks of import cover remaining currently, any sharp rise in import demand is likely to depress foreign exchange reserves. This, along with gradual deceleration in the current account surplus will lead to high deficit financing. With external inflows in terms of foreign direct investment (FDI) and portfolio investment (PI) staying ashore, foreign exchange reserves will continue bearing the pressure to finance the deficit.
External funding in form of a coalition support fund (CSF) and IMF funds will improve foreign exchange reserves; however, this would be nothing more then a short term solution. With the start of FY12, the government is expected to retire IMF loans and other bi-lateral and multi-lateral loans. This debt servicing will further put foreign exchange reserves to test as experienced in November 2010, when debt servicing of $391 million was reached, utilising the foreign exchange reserves.
