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The Economist Intelligence Unit expects the Pakistan rupee to continue facing significant downwards pressure in the months ahead. Still, we believe that the authorities will be broadly successful in keeping the exchange rate against the US dollar relatively stable ahead of the parliamentary polls, due by August However, following the elections, Pakistan's widening current-account deficit, weakening foreign-exchange reserves position and growing interest-rate differential with the US will lead to a much weaker currency.
In our view, this depreciation will help to address growing macroeconomic imbalances and put the overall economic outlook on firmer footing. The Pakistan rupee has in many ways defied gravity over the past few months, trading at a relatively stable level against the US dollar. This has been despite economic fundamentals pointing towards significant depreciatory pressures. For instance, Pakistan is faced with a rapidly widening current-account deficit, driven primarily by a rising merchandise trade deficit, reflecting the broader struggle to retain competitiveness in global markets.
We believe that the recent episode of currency volatility witnessed in early July highlighted the determined and intrusive role that the authorities are playing in ensuring such exchange-rate stability. Over the following days, however, the exchange rate quickly reverted back close to its past level, and has been trading at a level close to PRs The finance minister, Ishaq Dar, expressed his displeasure at the development and moved swiftly to appoint a new permanent governor, Tariq Bajwa , for the State Bank of Pakistan SBP, the central bank.
He subsequently stated that he had decided with his team—but without consulting the Ministry of Finance—that such currency depreciation was necessary to stem imbalances in the country's external sector.
Mr Riazuddin's decision remains controversial within Pakistan and has been the subject of a hearing in parliament. However, we broadly viewed the move as positive, as the policy of trying to maintain such a strict level of exchange-rate stability against the US dollar was and remains unsustainable.
In our view, it is not a question of if but when the Pakistan rupee will depreciate by a larger extent. This would be consistent with the approach taken in the past. In the exchange rate fell from an average of PRs Other domestic factors reinforcing our view include an ongoing decline in total liquid foreign-exchange reserves, which will make it increasingly difficult to intervene in foreign-exchange markets. The decline in foreign-exchange reserves could lead to more jitters among overseas investors over Pakistan's ability to service its foreign-currency denominated debts.
Fiscal slippage ahead of the polls is also raising concerns among investors over the government's commitment to fiscal consolidation. Moreover, as concerns over macroeconomic imbalances grow, the country also faces major political uncertainty. In late July the Supreme Court disqualified the then prime minister, Nawaz Sharif, from holding public office. We also expect external pressures to increasingly weigh on the authorities' attempts to maintain exchange-rate stability.
We have made a major revision to our global forecast this month and now project that the US economy will experience a technical recession in rather than This will have important ramifications for Pakistan. This contrasts with monetary easing, taking the key interest rate to around 0. The increase in the interest-rate differential with the US as the Fed continues to tighten monetary policy for much longer will result in further depreciation pressure on the Pakistan rupee.
Market opportunities Business environment Additional subscription required. The political angle We believe that the recent episode of currency volatility witnessed in early July highlighted the determined and intrusive role that the authorities are playing in ensuring such exchange-rate stability.
Looking ahead Mr Riazuddin's decision remains controversial within Pakistan and has been the subject of a hearing in parliament. A different global picture We also expect external pressures to increasingly weigh on the authorities' attempts to maintain exchange-rate stability. Census has fiscal and political consequences. Will the prime minister resign? Featured analysis China's rising influence across Asia has weakened the pressure to adhere to democratic norms.
The leverage that each country has will prevent a collapse in relations, but trust will remain in short supply. Early-harvest CPEC projects will boost overall capacity, but we do not expect a dramatic transformation in