The Pakistani currency experienced a setback in its recent gains as it declined against the US dollar in both the inter-bank and open market. This drop can be attributed to the persistent decrease in the country’s foreign exchange reserves. Additionally, the depreciation of the rupee has led to a surge in the price of gold. These developments raise concerns about the stability of the currency and its impact on the economy.
Pakistani Currency Depreciates in the Inter-Bank Market
In the inter-bank market, the Pakistani currency witnessed a decline of 0.11%, equivalent to Rs. 0.30, reaching Rs. 285.68 against the US dollar. This depreciation can be attributed to the continuous decrease in the country’s foreign exchange reserves. Such a drop raises concerns about the overall economic stability and the country’s ability to meet its international financial obligations.
Open Market Reacts to Currency Decline
Similar to the inter-bank market, the open market also experienced a decline in the Pakistani currency. The exchange rate dropped by 0.33%, or Re 1, reaching Rs. 300 against the US dollar, according to the Exchange Companies Association of Pakistan. This decrease further reinforces the challenges faced by the country’s economy and raises questions about the factors contributing to this ongoing trend.
Gold Prices Surge as Rupee Depreciates
The depreciation of the Pakistani rupee has had a direct impact on the price of gold. As the currency weakened, the price of gold surged by 1.75%, amounting to Rs4,000, and reached Rs233,000 per tola (11.66 grams). This increase in gold prices can be attributed to the loss of confidence in the currency and the need for alternative investment options amid market uncertainties.
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Continuous Decline in Foreign Currency Reserves
The decline in the Pakistani currency is closely linked to the consistent decrease in the country’s foreign currency reserves. For the fifth consecutive week, the State Bank of Pakistan (SBP) reported a decrease in reserves, amounting to $102 million. As of the week ended May 26, 2023, the foreign exchange reserves stood at $4.09 billion, primarily due to the repayment of external debt. This trend raises concerns about the country’s ability to maintain a stable currency and manage its financial obligations effectively.
Temporary Recovery Followed by Lingering Concerns
Although the rupee experienced a significant recovery of Rs. 27 in the open market on Thursday, as reported by the Forex Association of Pakistan, concerns still persist. Other currency dealers in the open market observed a recovery of approximately Rs12, reaching Rs299/$, after commercial banks were permitted to purchase US dollars from the inter-bank market to settle international credit card payments. However, this decision may have unintended consequences and could potentially exacerbate the pressure on the rupee in the long run.
Conclusion:
The recent decline in the Pakistani currency against the US dollar, both in the inter-bank and open market, along with the surge in gold prices, highlights the challenges faced by the country’s economy. The continuous decrease in foreign exchange reserves raises concerns about the stability of the currency and its impact on international financial obligations. While temporary recoveries have been observed, it is essential to address the underlying issues to ensure a more stable and sustainable economic environment.