KARACHI, Nov 21: The State Bank on Wednesday allowed the banks to buy and sell foreign exchange between themselves even if their buying or selling is not meant for the customers.

In June 1999 the SBP had stopped banks from buying and selling foreign exchange between themselves. The central bank had allowed them to buy or sell foreign exchange in the inter-bank market for their customers only.

While announcing the withdrawal of this restriction, the State Bank said in a circular on Wednesday that the move was aimed at further liberalizing the foreign exchange market.

Senior bankers told Dawn that they were still supposed not to make forward buying or selling of foreign exchange for less than a month.

Banks were refrained from making forward buying or selling for less than one month also in June 1999 when the central bank had placed a couple of checks on foreign exchange market to minimize the element of speculation. It made sense then because the rupee was free-floated on current account only a month earlier and banks were out to attack the fragile local currency for money making: foreign exchange reserves were also below the mark of $2 billion.

It was also against this backdrop that immediately after the free float announced on May 19, 1999 the central bank had placed an unofficial cap on the exchange rate that remained in place till July 20, 2000. The cap was maintained so religiously by the SBP that people generally think that the rupee was free floated in July 2000 — and not in May 1999. Since July last year the SBP has taken several steps to liberalize the foreign exchange regime to meet the conditions of the $600 million IMF standby agreement (SBA).

The SBA is over now but since Pakistan has agreed to implement the IMF-prescribed reforms for another three-years to get medium term financing the State Bank would likely make foreign exchange market more liberal in the days to come. Central bankers say with the foreign exchange reserves of the country now at $4 billion further opening up of the foreign exchange market does not pose a big threat.

Senior bankers said the lifting of the restriction on inter- bank buying and selling of foreign exchange without any customer requirement behind, would make the market liquid and efficient.

But they warned that the relaxation announced by the State Bank might lure some bankers into currency speculation thereby weakening the rupee. “I do not discount this possibility but since the rupee is pretty strong at the moment I do not see an early attack on the exchange rate because of this relaxation,” said treasurer of a foreign bank.

The rupee on Wednesday closed 19 paisa up overnight at 60.93/60.98 for ready buying and selling in the inter-bank market despite payment of an oil import bill of more than $10 million. Some bankers said the rupee was trading as low as 61.23 early in the morning when the banks were lining up dollars to make the oil import payment but once the payment was through the rate started falling and settled at 60.93/60.98 per dollar.