Rupee bounces back on news of Dar’s return

Oil price slump also provides support as currency gains Rs2.63 vs dollar

KARACHI:

Pakistani currency bounced back 1.11% (or Rs2.63) to close at Rs237.03 against the US dollar in inter-bank market on Monday, making the first major recovery in the past one and a half month ahead of the return of former finance minister Ishaq Dar from self-exile to Pakistan.

Simultaneously, the slump in international oil prices to below $80 per barrel, compared to $116 in June 2022, helped the rupee make the much-awaited recovery. The oil price plunge may significantly reduce Pakistan’s import bill as the country heavily relies on imported energy to meet demand.

Earlier, the domestic currency resisted a fresh fall below the all-time low of nearly Rs240 for most of the last week. It made a token recovery of 0.03% (or Rs0.06) to Rs239.65 on Friday, breaking a downward streak of the past 15 consecutive working days.

The currency lost almost 12% (or Rs25) in the 15 working days to Rs239.71 against the US dollar, just Rs0.23 shy of the all-time low of Rs239.94 hit on July 28, 2022.

The major recovery of the rupee took some shine off gold as the precious metal’s price fell by a notable Rs6,500 to Rs143,300 per tola (11.66 grams) on Monday.

“The rupee’s recovery seems short-lived considering the weak economic fundamentals,” independent economist Saad Hashemy said while talking to The Express Tribune.

According to Hashemy, the factors impacting the rupee include the US dollar’s continued strengthening against other global currencies, Pakistan’s high debt obligations, expected increase in dollar demand when administrative import controls are eased and weak Real Effective Exchange Rate (REER) – the value of rupee against a basket of trading partners’ currencies – as it is hovering close to 100 points. If REER rises beyond 100, it will make imports cheaper and exports expensive. “This will lead to the deterioration of balance of trade while authorities are working to improve it as well as the current account deficit,” he said.

Secondly, the dollar’s strengthening in the wake of a hike in the US interest rate will not let the rupee sustain the uptrend. “Global currencies including the pound sterling and euro have dived versus the dollar. How can the rupee sustain the gains?” Hashemy asked.

The turnaround in sentiment ahead of the return of Ishaq Dar may, however, help the rupee extend the recovery a little longer than the earlier assumption of a short-lived recovery.

“The expected arrival of Ishaq Dar has sparked hope that stability will return to the domestic politics and economy. The outlook has helped the currency partially gain ground,” the analyst said.

Dar is known for artificially strengthening the rupee. He is set to become the next finance minister as Miftah Ismail has stepped down. The return of stability to the domestic politics and economy may build the confidence of friendly countries, encourage them to deposit dollars in the State Bank of Pakistan (SBP) and make swift decisions on investing around $6.2 billion in different sectors of Pakistan’s economy.

The inflows will help build the country’s foreign exchange reserves. They have depleted to critically low levels of less than six weeks of import cover at $8.3 billion.

Gold loses shine

With the latest drop of Rs6,500 per tola, gold has cumulatively decreased by Rs11,500 in the past four working days to Rs143,300.

“The US dollar’s strengthening has made gold less attractive globally these days,” AA Gold Commodities’ Director Adnan Agar said.

The combination of recovery of the rupee and dip in the precious metal price in the global market paved the way for reduction in the commodity’s price in Pakistan as well.

All Pakistan Saraf and Jewellers Association (APSJA) reported that gold dropped by a meagre $2 to $1,640 per ounce (31.10 grams) in the global market on Monday. It was hovering around $1,730 some two weeks ago.

Published in The Express Tribune, September 27^th, 2022.

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