Key Takeaways
- US Federal Reserve raised interest rates by 25 basis points.
- Analysts warn of potential PKR depreciation and increased external debt servicing costs.
- Experts caution on the impact of higher US yields on Pakistan’s fiscal scenario.
The US Federal Reserve has increased interest rates by 25 basis points, marking the first hike in three years. This move aims to address persistently high inflation, exacerbated by rising oil prices amid geopolitical tensions.
Analysts are cautioning that this decision could have significant implications for Pakistan’s economy. Ammar H Khan, an assistant professor at the Institute of Business Administration, suggests that Pakistan may increase its own interest rate by 50-100 basis points or see the PKR depreciate.
Waqas Ghani Kukaswadia, research head at JS Global, highlighted that the US Fed hike could add pressure on the rupee and tighten global financial conditions, making future external borrowing more expensive. However, he noted that Pakistan’s near-term financing is relatively insulated due to the $3 billion Eurobond issued in September.
The impact on Pakistan’s economy is expected to be moderate, according to Khurram Husain, a business journalist and Dawn columnist. He stated, 'The hike is large enough to annoy US President Donald Trump but too small to help bring down yields in 10-year and 30-year paper.' Husain added that the exposure for Pakistan is not significant, with the increase in external debt service costs being in line with the 0.25% hike.
Financial analyst Jibran Sarfraz expressed concern, noting that the 25bps surge could hurt the fiscal scenario of emerging markets like Pakistan. He warned that Pakistan could face capital flight as investors shift their capital into US treasuries due to higher yields, leading to PKR depreciation and reduced dollar supply.
The US dollar has already hit a seven-week high, and shares in Asia, including MSCI’s broadest index of Asia-Pacific shares outside Japan and Japan’s Nikkei, have edged up. The Pakistan Stock Exchange opened positively, gaining 0.90% by 1pm.
Pakistan’s external debt is predominantly denominated in dollars, which could exacerbate the situation if the dollar strengthens further. Analysts are closely monitoring the situation to assess the potential impact on the country’s economy.
In conclusion, while the US Federal Reserve’s interest rate hike is a significant global event, its direct impact on Pakistan is expected to be moderate. However, the country’s policymakers must remain vigilant to mitigate any adverse effects.
On a forward-looking basis, we may either increase the interest rate by 50-100bps, or the PKR may depreciate.
Ammar H Khan, Assistant professor of practice at the Institute of Business Administration (IBA)
The US hike and signals for another one were putting some upward pressure on the dollar and downward pressure on other currencies.
Mark Zandi, Chief economist at Moody’s Analytics
The South Asian nation could face capital flight as investors shift their capital into US treasuries due to higher yields, leading to PKR depreciation as Pakistan could face reduced dollar supply.
Jibran Sarfraz, Financial analyst
