Rupee to gradually gain in 2009, reserves to reach $15.5 billion

[Naveed Yaseen]

KARACHI: Pakistani rupee is likely to gain gradually against the US dollar during the rest of the year, says a foreign exchange analyst of a leading foreign bank.

Priyanka Chakravarty, an India based FX strategist at Standard Chartered Bank, says the IMF’s decision to allocate an additional $3.2bn to Pakistan, and the ensuing sovereign credit rating upgrade by Standard and Poor’s, bode well for the currency. She says the rupee is not likely to lose value despite pressure from a deteriorating trade deficit due to rising commodity prices.

“We are sanguine about the balance-of-payments outlook and expect FX reserves to reach $15.5 bn by year-end. Hence, we believe that upside risks to USD-PKR are materially lower over the next three to six months. In line with this, we rule out the possibility of runaway weakness and expect a gradual uptrend in USD-PKR for the rest of the year,” she adds. “Going forward, we expect the current account deficit to narrow further to $8.4bn (4.9% of GDP) in FY10 on weak import demand and robust growth in remittances.” She says that higher official assistance and a lower current account deficit will further strengthen the FX reserves position. Developments in the past few weeks should boost investor confidence in Pakistan, she says.

”We expect the turnaround in private inflows, along with continued international aid, to ease upward pressure on USD-PKR in the short term,” says Chakravarty.

Key risks to this view are ongoing political turmoil and the associated security threats, which may prevent a sustained pickup in portfolio inflows into Pakistan, she cautions.

USD demand is likely to stay elevated due to the ongoing shift to a flexible exchange rate regime, but the build-up of FX reserves is likely to provide relief and limit the upside to USD-PKR, the analyst says. “That said we do not believe that the balance-of-payments situation will ease enough to turn the currency’s tide, as the outlook for private inflows remains clouded. In the absence of political stability, capital flows are likely to stay fickle.” staff report

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