Rupee crosses 190 vs US dollar

Pakistani currency maintained its record breaking spree, as it surpassed a major barrier of Rs190 against the US dollar for the first time in the inter-bank market mainly owing to political and economic instability in the country.

The rupee dropped 0.72% (or Rs1.36) to an all-time low at Rs190.02 against the greenback on Wednesday, compared to Rs188.66 a dollar on the previous day, according to the central bank.

Considering the rupee has declined significantly below its fair value, experts said that the government should support the currency by giving a clear timeframe for the next general election and elaborating on the steps it has taken or going to take to resume the IMF’s loan programme as soon as possible.

“The central bank may be considering increasing the benchmark interest rate by 150-200 basis points in another emergency meeting to arrest the continuous decline of the rupee,” an expert said while talking to The Express Tribune. Federal Ministry of Finance’s former adviser Dr Khaqan Hassan Najeeb said that the government and the State Bank of Pakistan (SBP) must come into action to reduce the growing pressure on the rupee.

“The action plan must include completion of the seventh review of Pakistan’s economy with the International Monetary Fund (IMF), restricting import of non-essential items and supporting exporters through extending bank financing,” he said. The delay in the IMF loan tranche of $1 billion, China’s rollover of $2.3 billion loan as well as inflows from friendly countries “has caused uncertainty in the domestic capital markets”.

He said that the pressure on the rupee was mounting due to the widening of current account deficit by $1.5 billion a month, depleting foreign exchange reserves that reached the critical level of $10.5 billion and the growing trade deficit, which hit a historic high at $39.2 billion in the first 10 months of current fiscal year.

BMA Capital Executive Director Saad Hashmi said: “The rupee may partially recover to Rs180 against the US dollar, after the IMF approves the resumption of its loan programme (talks to be held in Doha on May 18).”

The rupee has declined to Rs190 against the greenback because of concerns on both the political and economic fronts, he said. Besides, the depletion of foreign exchange reserves to the insufficient level that covers two months of imports, compared to the usual three months of import cover, has also mounted pressure on the rupee.

“The rupee will start stabilising as soon as the government announces removal of subsidies on petroleum products and electricity, as the measure will reduce the demand for the commodities and cut energy imports,” he said.

Pakistan’s non-energy import bill has continued to contract for the past two months (February-March 2022).

Another expert, who spoke on condition of anonymity, said that the government should give a clear timeframe for the next general election.

“The election should not be held before September 2023, so that the government could give an out-of-the-political-pressure budget and will have time to implement the commitments it will make through the budget for FY23,” he said.

“A good budget and its implementation will support economic wellbeing and ease pressure on the rupee.” He expected that the central bank may call an emergency meeting to revise up the benchmark interest rate. Earlier, the bank increased the key rate by 250 basis points to a two-year high at 12.25% in an emergency meeting on April 7.

Gold spikes

The downward trend in the rupee, however, jacked up the gold price to an all-time high at Rs135,700 per tola (11.66 grams), according to the All Sindh Saraf and Jewellers Association (ASSJA).

The bullion surged by Rs1,300 to Rs135,700 per tola, despite its price fell $11 to $1,852 per ounce (31.10 grams) in the world market.

“The rupee depreciation caused the jump in gold prices, as Pakistan meets its local demand for the commodity through imports,” K-Trade Securities’ analyst Rizwan Ahmed Samra said.

He said that gold would have been cheaper compared to its current price (in dollar-value), if Russia-Ukraine conflict had not taken place, as the dollar is strengthening against many currencies around the world.

“Gold price goes down when the dollar is strengthening and vice-versa,” he underlined. “Russia and Ukraine war has created some safe haven demand for gold globally these days.”

The US central bank Fed has announced increasing its benchmark interest rate by a cumulative one-percentage point over the next couple of meetings scheduled in a few months to come. “This will be negative for gold (in dollar value) at world markets.”

However, rupee-dollar parity would continue to play an important role in determining gold price in Pakistan, he said.

Published in The Express Tribune, May 12^th, 2022.

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