Sajid Irfan

The Pakistani currency had been depreciating very fast against dollar in the interbank market since April 2022, which created obstacles in each and every sector of the country. Uncertain situation in Pakistan’s bond market makes investors reluctant to invest.

Director General of International Islamic University Islamabad (IIUI) Prof Dr. Abdul Rashid told WealthPK that the financial sector of each and every country is highly dependent on appreciation and depreciation of the currency. He said when the currency appreciates, most sectors witness a boom in their progress, while depreciation indicates arrival of recession.

Dr. Abdul Rashid stated that the country’s debt has been among the worst performing this year among the emerging market countries, signalling investors’ concerns. He pointed out that discount on the country’s bonds also remains smaller as compared to other emerging markets. He said it is expected that an International Monetary Fund (IMF) bailout coupled with bilateral financing support may help Pakistan in this critical financial situation.

“The government officials anticipate that depreciation of the rupee against the dollar will help to reduce external account vulnerabilities. Exports are expected to increase beyond $31 billion, while imports will be contained as imported goods become expensive in comparison to local products,” he said.

Dr. Abdul Rashid said that Pakistan has always been adopting Malaysian model for launching its international bonds and it is linked with the US treasury over London Inter-Bank Offer Rate for providing mark-up for investors. Pakistan has repaid $40 million coupon on the Islamic denominated Sukuk bond, which was due on July 31, 2022.

“Pakistan’s dollar-denominated sovereign bonds have stabilised after investor sentiment improved and the local currency bounced back, changing the view the country is in danger of defaulting on its debt amid shrinking foreign reserves,” he said.

The IIUI DG stated that the yield on the five-year third Pakistan International Sukuk Company Limited, maturing on December 5, 2022, fell 116 bps to 46.69%. The bonds and the currency tumbled, with the yields on Eurobonds and Sukuk spiking more than 50% last month due to worries about delay in the IMF bailout package caused by political uncertainty.

“In the previous month, the local currency appreciated which resulted in stabilization of stock and bond market.  This appreciation was due to the imposition of ban on luxury imports which will bridge the current account deficit,” he added.

Dr. Abdul Rashid stated that the financing needs stem from a current account deficit of around $10 billion, and principal repayments on external debt of around $24 billion. In order to boost Pakistan’s foreign exchange reserves position, it is important for Pakistan to be slightly overfinanced relative to these needs.

Credit: Independent News Pakistan-WealthPak