Volatile stock and currency



May 15, 2022

Volatile stock and currency

Noor Israr talks about the highly fluctuating stock trade

The Volatile stock and currency political uncertainty of months has badly affected the economic scenario of the country with the stock trade taking the worst hit. The sharp downturn in economic situation coupled with drastic depreciation of rupee has unnerved the financial managers of the country. The most problematic aspect of the entire phenomenon is the consistent mismanagement of economic affairs with successive government proving inadequate to handle them with the result that the current imbroglio appears to be almost without a solution. Though the stock trade is by nature a fluctuating exercise but what matters are the circumstances underpinning its sharp rise or decline and it is clear currently that the malaise is deeper than perceived making its solution more complicated.
The previous government was held responsible for irresponsible conduct of economic affairs but nothing has substantially changed as political foot-dragging by the incumbent government on the reversal of fuel and electricity subsidies — a prerequisite for the resumption of the loan programme by the International Monetary Fund — had further eroded the confidence of stakeholders. The recent meltdown is symptomatic of growing concerns regarding worsening economic fundamentals and a disturbing near-term outlook due to the government’s indecision on economic challenges. The lack of confidence exhibited by the trading markets strongly point out at the increasing cleavage between the policies pursued by economic managers and the underlying economic vulnerabilities and investors’ waning confidence.
Whatever the reasons given by a cross-section of economic opinion the very fact the a horrid combination of factors is indeed responsible for this difficult ranging from deteriorating fiscal conditions, increasing external-sector difficulties, political uncertainty ahead of the next budget and bearish trends overtaking global stock markets on rising US interest rates. The problem is aggravated by the fundamental weakness of the coalition that is considered a hastily assembled patchwork of opportunistic politicians who place their interests above national considerations. This bunch of political functionaries brought in from differing backgrounds are still undecided about the reversal of the fiscally unsustainable energy subsidies, which is the prior action that IMF wants it to take before it agrees to restart funding. This is a serious flaw in the economic narrative of the new managers who do not have the courage to confront this reality though they took over the government with alacrity.
The new economic managers are afraid of a political backlash at a time when Imran Khan is working hard to rouse public fury against them and his well attended rallies are making fun of the political sagacity of the coalition to assume positions of responsibility. Though they are well aware that the problem with the energy subsidies is that the government may decide not to reverse them in the hope of avoiding greater inflation but the trade-off would mean significantly boosting the fiscal deficit, forcing more bank borrowing since foreign flows have dried up. This situation would entail pushing interest rates delaying the revival of the IMF programme further constraining options to secure dollars from both multilateral and bilateral lenders, as well as raise commercial loans. This is a genuinely difficult prospect to negotiate and far more uncertain to overcome.
The stock market is reacting to the gruesome fact that foreign exchange reserves are down to around $10 billion considered the lowest in recent times with the nine-month current account gap at over $13 billion and no hope of additional financing coming from friendly countries without an IMF deal. This worrying scenario is putting tremendous pressure on rupee that in turn is fuelling inflation and driving up interest rates and this position is highly inflammable and the new managers would try hard to avoid it. Despite the reluctance of the new government energy prices will have to be increased though Mian Nawaz Sharif and Ishaq Darr do not want that as they are afraid of the adverse political fallout but Pakistan desperately needs IMF programme to avoid default as has happened in the case of Sri Lanka.
All these factors fueled the meltdown of the stock market as it is very sensitive to even the minutest economic indicators. This was precisely what happened as the stock market at one point lost 3.23 per cent of its market value. The prevailing sentiment was the depletion of foreign reserves and delay in the resumption of the IMF programme. It was specifically pointed out that the government has seemingly, so far, drawn a blank when it comes to securing funds from friendly countries. The pressure in global equity markets is also hurting sentiment and the word of caution is that in the near future the market would track progress on the foreign reserves. For the moment no development on funding from Saudi Arabia, UAE and the IMF has worried investors along with the reluctance of the incumbent government to pass on the petrol subsidy to the people.
Sectors contributing to the performance included banks (-305.1 points), cement (-237 points), technology (-183.2 points) and exploration and production (-130 points). It was quite obvious that the investors had become fearful after reports suggested that talks with the IMF would resume at a later date and that the government was also not ready to abolish the subsidy on petroleum products which was putting pressure on the economy. The risk of interest rates rising in the next monetary policy also propelled investors to exit the equity market. Uncertainty about debt repayments and depletion of foreign exchange reserves pushed investors to the sidelines as they awaited a positive trigger from the IMF through the resumption of its loan programme. Market dealers pointed out that in order to control the situation the government needs to lay out a concrete economic plan adding that a strategy needs to be devised regarding oil prices and to control rising commodity prices.
The substantial decline in the stock market was aggravated by a steep depreciation of rupee that is fueling unprecedented inflation. It was accordingly noted that the US dollar reached an all-time high against the rupee, soaring to Rs.190.90 in the interbank market. The greenback appreciated by Rs.1.36 at the market’s close, surpassing previous close of Rs.188.66. The last time the dollar reached an all-time high was on 1 April, when it crossed the Rs.189 mark. In the immediate aftermath of the change in government on 11 April, it had gone down but the correction soon ran out of steam and now the greenback is soaring again, reaching a new all-time peak. The rupee had been losing its value mainly because of an uncontrolled rise in imports and a relatively slower pace of growth in exports. This was reflected in the trade deficit, which reached $39 billion in July-April.
It is generally believed that the recent round of depreciation emerged after the political crisis deepened in the country which also created problems for the importers in arranging dollars to make payments; however, SBP remains silent over the current exchange rate situation. In times of currency depreciation, traders’ guidance triggers panic buying in the market. They convince importers to buy more in a short period to make their payments so this unnecessary demand creates a shortage of dollars in the market. At the same time, they advise exporters to not sell dollars and hoard it in anticipation of further depreciation which weakens the greenback supplies. TW

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Noor Israr has a discerning taste in music and is currently studying development economics at UCF


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