The Pakistani rupee has hit a record low against the UD dollar, which also crashed the stock market. The country’s credit rating outlook has become negative from stable despite a bright prospect of the revival of the International Monetary Fund’s $7 billion loan programme. On the other hand, inflation is expected to rise further, according to the government’s own estimates. It means the country, its government and people will face even more serious problems in the coming weeks and months.

Pakistan’s problems have been compounded by rising political instability in the country, especially after the Pakistan Tehreek-i-Insaf (PTI) swept by-elections in Punjab. Now Imran Khan’s party is in a strong position to pave the way for the ouster of the coalition government in the Centre and fresh elections. The country’s headline inflation has already accelerated to a record peak of 21.32pc. According to the Pakistan Bureau of Statistics (PBS), the inflation rate is now the highest in the past 14 years. The two highest figures of over 21pc inflation in June were recorded in 2008 and 2022 as per the available data between 1991 and 2022. The government, in a bid to meet IMF conditions, has withdrawn subsidies on fuel, electricity and gas and their prices have reached historic levels.

On the other hand, the rupee fell to an all-time low against the dollar, closing at Rs222 in the interbank market recently. The rupee’s decline is being attributed to panic buying of the dollar by banks in the interbank market following fears of a change in the government in Punjab and the Centre after the by-polls.

The panic in the market has increased after Fitch Ratings downgraded Pakistan’s credit rating outlook to negative. Citing its reasons, the global credit rating agency says the country may fail to implement its commitments with the IMF in letter and spirit, and face a shortfall in foreign funding once the loan programme ends in June 2023. “Fitch Ratings has revised Pakistan’s outlook to negative from stable, while affirming its long-term foreign currency (LTFC) issuer default rating (IDR) at ‘B-’,” the agency said.

The revision of the outlook to negative reflects significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022. “We assume IMF board approval of Pakistan’s new staff-level agreement with the IMF, but see considerable risks to its implementation and to continued access to financing after the programme’s expiry in June 2023 in a tough economic and political climate.” The rating agency estimated that the IMF would increase the amount of the loan programme by $1 billion to a total of $7 billion and extend its duration till June 2023. Earlier, the loan volume stood at $6 billion and was to expire in September 2022. The IMF has already released $3 billion under the programme. “Renewed political volatility cannot be excluded and could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme,” it noted.

The rating agency said that limited external funding and large current account deficits (CADs) have drained foreign exchange (FX) reserves, as the State Bank of Pakistan (SBP) has used reserves to slow currency depreciation. Liquid net FX reserves at the SBP declined to about $10 billion or just over one month of current external payments by June 2022, down from about $16 billion a year earlier. “We estimate the CAD reached $17 billion (4.6pc of GDP) in the fiscal year ended June 2022 (FY22), driven by soaring global oil prices and a rise in non-oil imports boosted by strong private consumption. Fiscal tightening, higher interest rates, measures to limit energy consumption and imports underpin our forecast of a narrowing CAD to $10 billion (2.6pc of GDP) in FY23.”

Public debt maturities in FY23 are about $21 billion. Maturities of about $9 billion are to bilateral creditors (chiefly Saudi Arabia and China), which should be fairly easy to roll over with an IMF programme in place. The SBP estimates that the economy was operating above potential in FY22, and “we forecast slower growth of 3.5% in FY23 amid fiscal and monetary tightening, high imported inflation, and a weaker external demand outlook, all of which will also hit household and business confidence,” it observed.

However, the State Bank of Pakistan (SBP) said the recent rupee depreciation was “in large part a global phenomenon” and the depreciation in the rupee value since December 2021 has only been 3pc. “This is a better measure of the strength and competitiveness of a currency than the US$ rate,” the SBP said on its Twitter account. It said that the recent movement in the rupee value was a feature of a market-determined exchange rate system. “Under this system, the current account position, relevant news items, and domestic uncertainty together determine daily currency fluctuations. Globally, the US dollar has surged by 12pc in the last 6 months to a 20-year high, as the Fed has aggressively raised interest rates in response to rising inflation,” it explained.

According to the SBP, headline inflation is likely to remain elevated around current levels for much of the current fiscal year before falling sharply to the 5-7pc target range by the end of the next fiscal.

However, all estimates of the government about inflation have proved wrong in the past. The last PTI government also failed to check prices despite tall claims. The declining value of the rupee will create a new wave of inflation in the country, which could be unbearable for the common people.