No let-up in rupee’s slide

KARACHI:

Pakistani currency and gold created new history on Thursday, as the local currency sank a fresh 1.63% (or Rs3.92) to close at a new all-time low of Rs239.94 against the US dollar in the inter-bank market on growing political and economic uncertainties.

The fading rupee played a key role in jacking up the gold price by a record 7% (or Rs10,500) in a single day to Rs162,500 per tola
(11.66 grams).

“Growing political uncertainty is killing the rupee,” AA Gold Commodities Director Adnan Agar said while talking to The
Express Tribune.

The faltering rupee and fast depleting foreign exchange reserves prompted the third global credit rating agency, S&P Global Ratings, to cut Pakistan’s credit outlook to negative from neutral. In the past month, Moody’s and Fitch Ratings did the same.

“The nation could be downgraded if support from bilateral and multilateral lenders quickly erodes or if usable foreign exchange reserves fall further,” Bloomberg reported, quoting from an S&P statement on Thursday.

Later during the day, Pakistan’s central bank reported in its weekly update that forex reserves further dropped by $754 million to less than six weeks of import cover at $8.57 billion “due to external debt and other payments.”

The falling reserves would keep mounting pressure on the rupee till multilateral and bilateral lenders and friendly countries revive their loan programmes for Pakistan sometime in late August 2022.

“The rupee may recover Rs30-40 against the greenback in a matter of one week if all political parties agree to shun their differences and come on the same page,” Agar said.

Pakistan has to manage import payments and foreign debt repayments with limited foreign exchange reserves over the next one month. IMF executive board is scheduled to meet to give its final approval for resuming its multi-billion loan programme for Islamabad in late August.

Other multilateral and bilateral lenders and friendly countries would follow the IMF to unlock their funding for Islamabad.

Finance Minister Miftah Ismail has said time and again that the country will not default on international payments. The rupee would stabilise in a few days as and when the ongoing pending import payments for June 2022 are done.

Read Rupee's downward spiral continues, inter-bank rate at Rs242

The import payment pressure is set to ease as imports for July are projected to amount to less than $5 billion compared to the second record high at $7.7 billion in June.

With the latest day-to-day drop, the rupee has cumulatively plunged 13.75% (or Rs29) in the past ten consecutive working days to date, according to the central
bank data.

The rupee had hit an intra-day low of Rs242.26 against the US dollar. It had closed at Rs236.02 on Wednesday.

The rupee saw its latest drop after Pakistan reported a five-month high current account deficit (CAD) at $2.30 billion for June and a second all-time high at $17.40 billion for the full fiscal year 2022 on Wednesday.

The country has continued to finance the widening CAD from foreign
exchange reserves.

Besides, US central bank – Fed – has once again aggressively increased its benchmark interest rate by 75 basis points to 2.25-2.50%. “The move has strengthened the US dollar against global currencies including Pakistan,” the analyst said.

The same (increase in rate by Fed) has agreed to global investors to relocate their investment into gold. Accordingly, the bullion price surged from $29 per ounce (31.10 grams) to $1,750 in global markets.

“The rupee depreciation multiplied the impact of the surge in the gold price in Pakistan,” All Sindh Saraf and Jewellers Association (ASSJA) President Haji Haroon Chand said, adding the country meets its local demand for the precious yellow metal through imports.

The gold may see a high in the range of $1,780-1,825 per ounce on the global market over the next one month and start reducing from there, Agar said.

It is difficult to project gold prices in the medium-term (two to three-month). The 40-year high inflation reading in the US is expected to peak in a couple of weeks. If it happens so, the Fed would stop increasing its interest rate and may consider cutting it back to low from next year, he said.

The reduction in the US interest rate would prompt global investors to relocate investment from gold to discounted stocks there. Accordingly, “gold would lose its shine.”

The up and down in global commodities would also impact their price in domestic markets as well.

Gold hit an all-time high at $2,077 per ounce during the peak Covid-19 pandemic in 2020.

Published in The Express Tribune, July 29^th, 2022.

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