By Major (R) Haroon Rasheed, a Defense and Strategic Analyst specializing in South Asian military dynamics, deterrence strategy, and defense modernization, and a member of the Research and Evaluation Cell for Advancing Basic Amenities and Development.
We have already indicated that if this war drags on for more than 2-3 months, its implications for Pakistan could be significant. 15 days have passed so far, and there is still no clear path to a resolution or a credible ceasefire.
In this context, the most frequently asked question is how the Pakistani rupee will react.
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The Short Term
In the near term, remittances from overseas Pakistanis remain strong due to Ramadan. Foreign exchange forward premiums are trading above money market levels, indicating that foreign exchange liquidity is relatively comfortable. The news of the IMF-Finance Ministry talks is also broadly positive.
Export receipts have eased somewhat in the past two weeks. At the same time, there is a conscious effort to phase in import payments so that there is no undue pressure on the interbank market on any given day. This approach may help reduce unnecessary pressure on the rupee.
Given all these factors, the rupee is likely to remain in a range over the next few weeks. However, two key financial pressures are looming:
- Large oil payments immediately after Eid
- Eurobond payments of over $1 billion
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A satellite image shows the Strait of Hormuz, a key maritime passage connecting the Persian Gulf to the Gulf of Oman, vital for global energy supply. (Getty Images).
The Medium Term
This is where things get pretty unclear.
The New Oil Regime
The Strait of Hormuz has now effectively become a key factor in determining oil prices. Markets are now trading on the potential for disruptions rather than actual supply cuts, making oil prices structurally more volatile. Oil is no longer just a commodity but a strategic asset.
- This is creating a new economic environment:
- The risk of continued increases in energy prices
- Sudden fluctuations outside the normal cycle of demand
- Structural uncertainty in global trade flows
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The Issue of Remittances
Remittances have quietly supported Pakistan in every crisis, but this support is no longer as certain as it once was. If the Gulf economies slow down, the demand for labor will also decrease. If there are fewer workers abroad, foreign exchange inflows will also decrease, and domestic pressures may increase. This is a slow but powerful threat that could change Pakistan’s economic direction.
Satellite view of Kharg Island, located in the Persian Gulf off the coast of Iran. (Photo by Gallo Images/Orbital Horizon/Copernicus Sentinel Data 2024).
Global Financial Conditions
Global financial conditions could tighten as geopolitical risks rise. Pakistan’s Eurobond and CDS spreads have already risen by about 100 basis points, signaling a shift in foreign investor confidence.
This increases both the cost and uncertainty of borrowing from the market. Access to the Eurobond or Panda bond market may be difficult, while foreign direct investment and portfolio investment may also be limited. Thus, external financing will become more dependent on government policy confidence and the support of international institutions.
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Potential Impact
All these factors could lead to a widening of the current account deficit, increasing fiscal pressures and reducing policy flexibility. As inflation expectations rise, interest rates could remain high for longer. This could put downward pressure on the rupee and weaken the pace of economic growth. The overall impact could be quite damaging.
Credit: Bloomberg
Base Case
Pakistan is unlikely to spend its foreign exchange reserves quickly to prop up the rupee. Instead, the adjustment will come through tightly regulating imports and making the external balance more sustainable. The rupee may weaken gradually over time, but a sudden or large devaluation seems unlikely at this stage.
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By Major (R) Haroon Rasheed, a Defense and Strategic Analyst specializing in South Asian military dynamics, deterrence strategy, and defense modernization, and a member of the Research and Evaluation Cell for Advancing Basic Amenities and Development.
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