Dollar-gold syndrome hits South Asian currencies

The latest dollar-gold syndrome is hitting hard at least two major countries and their currencies, which are already suffering due to their poor external balances. India and Pakistan are the victims of the crisis, which means a huge South Asian population — more than one billion in India and 180 million in Pakistan — are suffering the financial and business fangs. Unless a miracle happens, there seems to be no easy end for the two countries, in the foreseeable future, to return to a normal growth path. Surprise of all surprises, Chinese, Bangladesh, Sri Lankan and several other currencies are doing pretty fine, as compared to their big neighbours — India and Pakistan. The Chinese renminbi is holding steadfast against the dollar for the last six months. The Bangladesh taka has, in fact, appreciated by four per cent and trades at 77.68 to a dollar compared to 81.50 last year.
Indian rupee last week depreciated to 65.56 to a dollar. It has lead to calling the Indian rupee as “Asia’s worst performing major currency” this year. The partially-convertible Indian currency is down nearly 15 per cent this  year due to its big current account deficit and capital account outflows. Pakistani rupee had depreciated to a historic low of Rs105 to a dollar just a few days backs. The dollar was trading at Rs103.65/68 in the inter-bank market and Rs104.10/30 in the open market these days.
What blighted the two currencies and its timing?
The plight of the Pakistani currency is more alarming as it happened during the annual inflow rush of Eid festival remittances, overseas Pakistanis send home to their families. The inflow was pretty high this year as July saw a record remittances of $ 1.4 billion. Overseas Pakistanis working in the GCC states, US and UK all contributed to the inflow.
The total home remittances, sent through official banking channels alone, during financial year 2012-13, which ended June 30 was a historic record of $14 billion. Billions more came through ‘hawala” and “hundi”.
Gold import also played a key role in sharp currency fluctuations in India and Pakistan. Since more than two centuries, Indo-Pak region have been up buying a record quantity of gold. Even now India is described as the “biggest gold-guzzler of the world.” It continues to be so because storing and investing into greenbacks and other hard currencies is still a game few indulge in the region. The common people feel more safe, secure and sound with gold, as nothing shines better than gold, as bullion is kept at home or given to brides at their weddings.
This summer saw gold prices decline considerably — making the bullion a highly attractive investment at a time when economies and the currencies of both India and Pakistan, were in doldrums. The dollar was rising. For a large number of people in the region, it was more attractive to convert their rupees and dollars into gold. But the cash used for this purpose was, largely, non-banked money.
“There was no significant draw down on dollar accounts during this period,” a senior banker said.
Pakistan, which imports around 300kg of gold each month, saw imports gong up five-times to 1,500kg a month, bullion market source say.
The numbers for India were much higher, both through official imports and by way of smuggling.
“A large part of the high, and easily imported gold in Pakistan was smuggled to India, although the demand in our own country was pretty high,” a bullion market spokesman said. But, than came restrictions enforced by Pakistani Finance Minister Ishaq Dar in July to stem the tide of gold imports, but smuggling stayed untouched and unaccounted for.
The gold import ban reaction is strong. All Pakistan Gem Merchants and Jewellers Association (APGM&JA) last week, threatened to shut down business unless the government addresses its demands.
“We want removal of the ban on gold imports,” the association’s chairman Saeed Mazhar Ali said.
The ban was imposed under Statutory Order 266 in July, restricting gold import for one month. The ban was imposed by the government on a demand by Pakistani forex dealers’ association, ostensibly, to check the depreciation of the rupee against the dollar.
“The rupee had actually depreciated due to the government’s wrong policies as it continued to print currency to meet its liabilities and the budget deficit, and  heavy repayments of loans to the IMF. The forex dealers also had forced the government to ban gold imports over what, they alleged, was thriving gold smuggling from Pakistan by the jewellery exporters,” Ali said. He  said the rupee continues to slide down against the greenback for the last 22 days despite the ban on import of gold. The ban has deprived the association members from importing the basic raw material used in jewellery production, thereby hitting foreign exchange earnings from jewellery exporters, Ali said.
Besides cheaper gold, what ails the Pakistani currency? It has been depreciating at a much faster rate against the greenback during the year to August 22, 2013, than ever before. It recorded a nine per cent depreciation of the rupee during this year. Even from the start of the current financial year 2013-14 on July 1, it depreciated 3.68 per cent on the back of growing concern over its worsening balance of payments and external accounts. It is due to a poor capital account, and depletion of its forex reserves after repayment of IMF credits. Depreciation of the Pak rupees is the worst in the region. “Lack of financial inflows, heavy payments for oil imports and debt retirement to IMF have weakened the rupee causing the most trouble,” Sayem Ali, forex analysts at the Standard Chartered Bank, said.
“Holding of dollars outside the banking system, instead of selling in the market has also put pressure on the Pak rupee,” he said.
Pakistan’s official forex reserves of $5.2 billion with State Bank of Pakistan, the central bank, are sufficient to pay for just 30 days of imports. While an anticipated $6.6 billion loan package from IMF is likely to materialise in late September or early October, the pressure on the forex reserves is growing. The pressure led this week to Finance Minister Dar to call for $500 million credit for 12 months from the banks in Pakistan at a rate five per cent plus the London Inter Bank Offered Rate, which will bring the total to 5.067 per cent. The IMF and $500 million bank credit will indicated how soon, and how far the pressure on the Pak rupee ease. It will also determine the future dollar-rupee parity. Till then, one has to wait.


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