What the US Fed hike could mean for Pakistan's economy

The US Federal Reserve has raised interest rates in the world’s largest economy by 25 basis points (bps), the first hike in three years.

The decision aims to tackle stubbornly high inflation that has been exacerbated by rising oil prices amid the US-Israeli war on Iran. Making the announcement, US Federal Reserve Chair Kevin Warsh stressed that the hike was not influenced by financial markets.

However, will the effects of the decision reverberate in Pakistan? Dawn takes a look at how it may impact Pakistan’s economy, with analysts voicing caution for the country’s own policy rate and external debt servicing.

US media outlet CNBC, citing experts, noted that for global markets, a “renewed US tightening cycle could mean a stronger dollar, greater pressure on currencies elsewhere and less room for other central banks to ease monetary policy”.

Mark Zandi, chief economist at Moody’s Analytics, told CNBC that the US hike and signals for another one were putting some upward pressure on the dollar and downward pressure on other currencies. This was already evident on Thursday, with the US dollar hitting a seven-week high.

Shares in Asia, including MSCI’s broadest index of Asia-Pacific shares outside Japan and Japan’s Nikkei, also edged up. Similarly, the Pakistan Stock Exchange (PSX) opened in the positive and gained 0.90 per cent by 1pm.

Commenting on what the US hike could mean for Pakistan, Ammar H Khan, assistant professor of practice at the Institute of Business Administration (IBA), said: “On a forward-looking basis, we may either increase the interest rate by 50-100bps, or the PKR may depreciate.”

Waqas Ghani Kukaswadia, research head at JS Global, also said the US Fed hike could add “some pressure on the rupee and tighten global financial conditions, while making future external borrowing expensive”.

“However, Pakistan’s near-term financing is relatively insulated, as the $3 billion Eurobond issued in September is already locked in. The bigger immediate risk remains elevated oil prices, given their direct impact on Pakistan’s import bill and external account,” he noted.

Business journalist and Dawn columnist Khurram Hussain quipped that the hike was “large enough to annoy” US President Donald Trump but “too small to help bring down yields in 10-year and 30-year paper”.

However, he added, there was “nothing major” in terms of the impact on Pakistan.

He explained that the exposure for the country was “not that large”.

“It will mean some increase in external debt service costs, in line with the 0.25pc increase. But that’s more or less it,” Hussain said.

Financial analyst Jibran Sarfraz, however, expressed concern over the Fed rate hike. He said the 25bps surge could hurt the fiscal scenario of emerging markets like Pakistan to a severe extent.

“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,” he said.

Sarfraz added to Hussain’s concerns, noting that Pakistan held significant external debt in dollars and therefore, the rate hike could spike the servicing and make payments costlier.

“However, the major threat to the entire mantra would be the escalating inflation due to a rise in the import cost of essential items, especially food products, and the cumulative inflation — which is already in double digits — could worsen numerically.”