Rupee rebounds after $4.2b Saudi support package

Local currency appreciates by by Rs2.49 against US dollar; gold plunges by Rs7,800 per tola

KARACHI:

The rupee staged a handsome recovery on Wednesday and appreciated by Rs2.49 to Rs172.78 against the US dollar in the inter-bank market after Saudi Arabia agreed to provide a $4.2 billion lifeline to Pakistan annually in the shape of cash assistance and oil supply on deferred payments.

Late on Tuesday, Riyadh announced that it would deposit $3 billion in the State Bank of Pakistan (SBP) and provide an oil credit facility of $1.2 billion to aid Pakistan’s economy and ease the pressure on foreign exchange reserves.

According to the SBP, the rupee had closed at Rs175.27 against the greenback on Tuesday.

A report of Arif Habib Limited stated that the rupee made the highest day-on-day recovery since April 2020.

Speaking to The Express Tribune, Arif Habib Commodities Managing Director and CEO Ahsan Mehanti said that the rupee rebounded sharply due to encouraging announcement by Saudi Arabia about depositing $3 billion in Pakistan’s central bank.

“All markets cherished the news flow and it is positively impacting the foreign exchange market,” he said. “Moreover, investor sentiment revived in all markets including financial, fixed income and equity segments.”

He added that continued recovery of the rupee could lead to a reduction in prices of petroleum products. But “the gap between demand and supply of dollars is far higher than the $3 billion assistance announced by Saudi Arabia,” he pointed out.

“The local currency should appreciate by a substantial margin to tackle the inflationary pressure,” Mehanti said, adding that the oil credit facility was also expected to lend support to the economy.

Echoing similar views, Alpha Beta Core CEO Khurram Schehzad stated that the optimistic announcement by Riyadh last night had a psychological impact on market spirits and helped ease pressure off the rupee.

“Pakistan imports oil worth nearly $15 billion every year and the Saudi oil facility will cover some of this value,” he pointed out. “Consequently, the dollar outflow is expected to decrease.”

With the appreciation of the rupee, both analysts expected the inflation level to go down. Also, it would reduce the import bill and ease the pressure on reserves, they said.

Quoting the State Bank, Schehzad said that the real effective exchange rate (REER) – the country’s cost of trade with the world – fell to 96 in September 2021, dropping by 0.7% compared to the previous month.

Cumulatively, REER has dipped by 4% since the beginning of current fiscal year 2021-22 and by around 7% since hitting the recent peak of 103 in April 2021.

“This means Pakistani rupee is undervalued by 7%, or Rs11 per dollar, and its fair value should be Rs164 against the greenback,” he said.

The expert added that the value of dollar fell Rs2.1 in the open market and it closed at Rs174.30.

Gold price dives

On the other hand, the gold price dived Rs7,800 to close at Rs124,200 per tola. A day earlier, the bullion had risen to an all-time high of Rs132,000 per tola.

AA Gold Commodities Director Adnan Agar said that improvement in the rupee drove the gold price down.

“In addition to this, the price of the yellow metal fell $30 per ounce in the global market, but it is an insignificant decline,” he said. “Weakening of the dollar and the drop in the international bullion market had a dual impact on the gold price in Pakistan.”

Gold is considered a safe-haven asset and its price surges in times of uncertainty. Pakistan is a net importer of gold.

All Sindh Saraf and Jewellers Association (ASSJA) President Haji Haroon Chand stated that the drop in gold price came in reaction to the facilities offered by Saudi Arabia.

The price of gold had soared by Rs14,000 to Rs132,000 per tola between October 18, 2021 and October 26, 2021.