State Bank of Pakistan seems to have little choice
Islamabad: The disqualification of a top politician will plunge economy to new lows and the rupee may loose value against US dollar beyond projections. It will be impossible to diminish large imbalances owing to the political instability. Pakistan Economy Watch has criticized struggle between political parties and observed that the recent move to disqualify Nawaz Sharif will hit political and economic situation in Pakistan.
If the top politicians continued their rivalry that rupee may hit 78 before end-June 2010 and it will have a definite impact on Pakistan’s sovereign credit rating, said Dr. Murtaza Mughal, President of Pakistan Economy Watch in a statement issued Tuesday. “The calculation is based on several propositions related to Balance of Payments (BoP), national assets and competitiveness,” he said.
Government is not doing any effort rather underpinning view of rating agencies. “We think that current account deficit will reduce to some extent but slowly and high oil prices as well as the importation needs of capital goods in the power sector will keep up pressure on the external deficit. “FDI flows and may be portfolio flows may pick up a bit but still leave a large BoP financing gap; as a result, State Bank of Pakistan will have but little choice other than to tolerate a weaker rupee, or risk defending it with its foreign exchange reserves for quite a long length of time,” said Dr. Murtaza Mughal.
Large imbalances can diminish but only gradually toward more sustainable levels, if Government takes it seriously. From a structural standpoint, Pakistan Economy Watch believes that high price increases and negative real interest rates effectively erode national savings. Savings dynamics will have to improve more or investment will have to plummet before we can envisage a reduction in the CA imbalance. However, a plunge in investment is not expected on account of capital expenditure needs in power sector. Thus, the CA deficit will narrow gradually and in the meantime we are far more likely to witness rupee weakness.-Pakistan Economy Watch