As Pakistan faces high inflation and the looming threat of rupee devaluation, investors are turning to gold and US dollars as their top choices for protecting their savings. With the International Monetary Fund (IMF) loan program on hold and no immediate resolution in sight, these assets are gaining popularity amidst the deepening economic crisis.
According to Adnan Agar, Director of AA Gold Commodities, “Gold and US dollars would be the go-to assets for investors, whether or not the IMF program or stock market are involved.”
Efforts to reinstate the stalled IMF loan program worth $6.5 billion have been ongoing since November 2022. However, it appears likely that the program will expire without resumption on June 30. The government plans to commence negotiations for a new program with the IMF staff after presenting the annual budget in the National Assembly on June 9.
The absence of an IMF program has taken a toll on the economy, leading to industry closures and a rise in unemployment. The longer the delay in engaging the IMF, the deeper the economic crisis is likely to become.
In this scenario, individuals with savings are carefully evaluating which asset will provide the highest return on investment. Agar believes that historically, the US dollar has been the preferred asset. However, its scarcity in the market due to critically low foreign exchange reserves, currently at $4.09 billion, makes it unavailable for investment purposes.
Agar hopes that the country will not default before September 2023 without the IMF, but the economy may face another squeeze due to choked imports, which are crucial for resuming factory operations.
Consequently, gold has emerged as an attractive investment option in Pakistan. In 2022, gold delivered the highest return on investment, experiencing a remarkable 41% increase. Gold’s appeal lies in its ability to protect against currency devaluation and its potential for price appreciation in international markets, particularly in the face of a possible recession in the US and a shift towards de-dollarisation of international trade.
Agar predicts that if the IMF program expires without revival in June, the rupee may devalue to around Rs300/$, compared to the current exchange rate of Rs285/$. If Pakistan defaults, the currency could plummet to Rs340-350/$, as the new IMF program under consideration would likely impose stricter conditions than the expiring one.
Taurus Securities estimates that due to a shortage of dollars and high foreign debt repayments, the rupee could reach Rs295/$ by the end of June 2023, putting further pressure on the exchange rate.
Agar explains that a potential rupee devaluation would automatically drive up the price of gold. Moreover, if global gold prices also rise simultaneously, the bullion market in Pakistan would experience significant growth.
In recent days, the price of gold in Pakistan dipped to Rs231,400 per tola (11.66 grams) from its all-time high of Rs240,000. Despite the shortage of US dollars, there is ample supply of gold in the local market. The Pakistan Mercantile Exchange (PMEX) alone holds an inventory of over 500 tola gold available for physical delivery to investors.
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