Last Update: May 25, 2023, 10:41 AM IST
A currency trader counts Pakistani rupee notes as he prepares to exchange US dollars in Islamabad, Pakistan (Image: Reuters/Representational)
The Pakistani rupee has become the weakest currency in South Asia after depreciating by Rs 308 per dollar in the open market.
Pakistan is inching closer to a default as the country faces unrest following the arrest of Imran Khan and a four-month delay in the bailout by the IMF.
Amid the economic and political crisis in Islamabad, Pakistan’s top 100 businessmen have issued a stern warning to the government about rising default risks and its impact on the business environment.
He has opposed the continuation of the super tax and expressed his concern about the imposition of an income tax of up to 7.5% on the profits he makes.
Ehsan Malik, CEO of the Pakistan Business Council (PBC), which represents the country’s 100 largest manufacturers, said the risk of default was high and the government should not expect fresh investments.
Pakistan’s industrial sector is already burdened, paying around 56 per cent of total taxes despite its 20 per cent share in the economy.
The Pakistani rupee has become the weakest currency in South Asia after depreciating by Rs 308 per dollar in the open market.
The currency recently hit its weakest level in South Asia with the Sri Lankan currency overtaking the Pakistani rupee. While the Sri Lankan rupee is at 304 against the US dollar, the Pakistani rupee has fallen to 308.
Meanwhile, warnings of a steep fall in the Pakistani rupee have been issued as analysts forecast a 20 per cent fall.
Economists are of the view that if the uncertainty and volatility continues and the International Monetary Fund (IMF) further delays the bailout package then the rupee may decline further.
If Pakistan fails to secure the IMF bailout, the rupee may fall to as low as 350 against the dollar in June. Pakistan is looking forward to a $6.5 billion bailout package, which was approved by the IMF in 2019 and is crucial for Pakistan to prevent defaulting on external payment obligations.
Pakistan’s foreign exchange reserves, which are at an alarmingly low level of $4.3 billion, are steadily depleting and require large amounts of foreign exchange to cover import costs and pay off foreign debt.
By the end of June, Pakistan has to repay foreign debt of $ 3.7 billion. An additional $3.7 billion is also needed every month to guarantee the smooth import of essential goods.
Sources said the State Bank of Pakistan has more than 20,000 letters of credit pending for clearance, but the bank is unable to clear import bills due to dollar crunch.
Besides, Chinese and Malaysian companies are now demanding advance payments from Pakistani traders as they are no longer trusting Pakistan’s economic system, sources said.
If Pakistan defaults, the country will lose access to international markers, trade and foreign bonds.
The country will also face trade restrictions and witness hyperinflation. The default will have the worst effect on the domestic banking sector and all commercial banks will face default.
Pakistan’s GDP will also contract in case of default and there will be heavy devaluation of Pakistani Rupee. Islamabad may also face lawsuits, sanctions and a rating downgrade.