Fed tightening may pressure PKR but rising oil remains bigger risk for Pakistan, warn experts

The US Federal Reserve recently increased interest rates by 25 basis points, bringing the benchmark rate to a range of 3.75%-4.00%. While this move may have some impact on Pakistan's economy, market experts believe that the rising price of oil poses a greater risk to the country. The Fed's decision is expected to raise dollar-based debt-servicing costs, making future external borrowing more expensive.

However, Pakistan's near-term financing is relatively protected as a previously issued Eurobond is already locked in. The State Bank of Pakistan's reserves are at a record $21.4 billion, foreign participation in the local debt market is minimal, and the recent Eurobond issuance did not cause significant fluctuations. The bigger concern is the impact of high oil prices on Pakistan's import bill and external account.

Inflation in Pakistan remains high at 11.1% year-over-year, and the real policy rate is only around 0.4%, making future rate cuts unlikely. Although the Fed hike could put pressure on the Pakistani rupee, the immediate risks appear to be more related to oil prices and Pakistan's dependence on borrowing, imports, and remittances rather than strong export growth.