Gold shines, rupee falls to record low

KARACHI:

Pakistani currency depreciated to a record low at Rs168.30 against the US dollar on speculative demand for the foreign currency in the inter-bank market on Monday. The weakening local currency may trigger a new round of price hikes and cause inflation in the economy.

Some of the financial experts said the renewed demand for the dollars has emerged from foreign portfolio investors who have continued to exit Pakistan’s local debt market. Besides, importers are on the rise with reopening of the local economy from the four-month-long lockdown.

An expert, however, speculated that depreciation in the rupee may have a direct link with the ongoing International Monetary Fund’s (IMF) loan programme worth $6 billion which “has been temporarily on hold for the past couple of months.”

BMA Capital Executive Director Saad Hashmi said, “The downward trend in rupee seems unsustainable, as the majority of related economic indicators are in favour of rupee.”

The currency lost Rs0.97 to hit an all-time low of Rs168.30 against the greenback. Since January 1, the rupee has lost 8.68% cumulatively.

Bloomberg reported that the rupee is “the biggest decliner in Asia this year.”

Arif Habib Limited Head of Research Tahir Abbas said, “The rupee is depreciating due to increase in demand for dollars, as imports are surging with the reopening of the local economy.”

Besides, foreign investors have pulled out a total of $36 million from rupee-denominated Pakistan Investment Bonds (PIBs) and T-bills since late last week.

Earlier, they had invested over $3.5 billion in the last fiscal year (July-June) and withdrew around $3 billion since the outbreak of the coronavirus pandemic in February in Pakistan.

“The outflow from T-bills has primarily mounted pressure on rupee (against the US dollar),” Pakistan Kuwait Investment Company (PKIC) Head of Research and Development Samiullah Tariq said the other day.

More importantly, the central bank is building up the country’s foreign currency reserves instead of supplying dollars in the inter-bank market. The development has also mounted pressure on the rupee, he added.

Another expert speculated that the IMF may have asked Pakistan to let the rupee depreciate to make exports viable and to discourage imports.

The IMF programme is in abeyance for the past couple of months. It has conditioned the resumption of the programme with an increase in electricity price and to increase the rate of taxes to generate higher revenues from taxes. However, the government has disagreed with the IMF.

“Islamabad is apparently not worried over the temporary suspension of the IMF programme. Simultaneously, the government moves suggest it is making efforts to fulfil the IMF’s tough conditions slowly and gradually,” he said.

Besides, the rupee may have come under pressure due to the big debt repayment in the near future, he stated.

Hashmi maintained that the downward trend in rupee does not seem sustainable as the receipt of the workers’ remittances and foreign direct investment (FDIs) both have continued to surge even during Covid-19.

The export earnings are improving with reopening of the local and global economies. The foreign currency reserves have continued to increase for the past couple of weeks and stood at over $12 billion at present - enough for over 3.5-month imports.

Imports stand stable, while current account deficit (CAD) has contracted by a huge 74% to $3.29 billion in the first 11 months of FY20. “The balance of current account may appear in surplus for the second successive month in June considering the remittance hit historic high of $2.47 billion in the month,” he added.

International travelling remains virtually suspended including a temporary halt in Hajj and Umrah travelling. Travellers spend billions of dollars abroad every year.

The petroleum oil prices remain low at around $40 per barrel compared to $60-70 per barrel in January-February, he said.

“All the economic indicators suggest the downward trend in rupee is not sustainable,” Hashmi warned.

Gold scales new peak

Gold hit a record high of Rs111,250 per tola (11.66 grams) in Pakistan due to a downward trend in rupee and uptrend in the precious yellow metal in the world markets.

All Sindh Saraf Jewellers Association (ASSJA) reported an increase of Rs1,600 per tola for local markets, while its price surged $7 to $1,813 per ounce (31.10 grams) in world markets.

Pakistan stays relatively a small market for gold. It, however, does not produce the commodity and mainly relies on imports to meet local demands. Accordingly, changes in international price and rupee-dollar parity also impact local pricing.

Published in The Express Tribune, July 21^st, 2020.

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