March 19, 2002	Tuesday	Muharram 4, 1423

KARACHI, March 18: From next month the State Bank would start returning to the banks more than $318 million foreign currency deposits that they had placed with the SBP and got their rupee equivalent.

The SBP issued a circular to all banks on Monday telling them that from April 1 they would not be required to surrender to the central bank the foreign currency deposits raised by them under the scheme called F.E. 31.

Under this scheme SBP had allowed banks to accept incremental deposits in the foreign currency accounts frozen on May 28, 1998. The condition was that the banks had to surrender to the central bank all incremental foreign currency deposits and get the rupee equivalent.

At the same time the SBP had also allowed banks to accept new foreign currency deposits under a separate scheme called F.E. 25. Under this scheme the SBP had allowed banks to keep the foreign currency deposits with them instead of surrendering to it. This scheme continues.

By allowing banks to keep the foreign currency deposits raised under F.E. 31 also with them the central bank has further opened up Pakistan’s foreign exchange regime—on the demand of the IMF.

The $318 million plus foreign currency deposits raised under F.E. 31 is part of Pakistan’s liquid foreign exchange reserves of about $5.2 billion of which roughly $3.7 billion is with the SBP.

Bankers say SBP will start returning the F.E. 31 deposits as they mature but they say that the process would be completed by the close of the fiscal year on June 30. Since part of the said deposits are of longer maturity the SBP has allowed the banks to make premature withdrawals.

Senior bankers say the return of foreign currency deposits to banks should deepen the inter-bank foreign exchange market and increase the forward premium rates. Till now banks were getting the forward cover against these deposits from the State Bank but the SBP circular says that the central bank would stop providing cover from April 1. “Naturally, then we will be getting the cover from the market and that would increase the forward cover rates,” said a senior local banker.

At present the SBP forward cover fee on dollar deposits is 8 per cent whereas the cover is available in the market at around 6 per cent.

The SBP circular says that not only it would stop providing forward cover on these deposits from April 1 but would also not allow rollover of existing cover. The banks “will be allowed to take up their forward covers both for deposits and to the extent of accrued interest from SBP by paying back equivalent Pak rupee at booked rates,” says the circular. Premature take-up would also be allowed.

Bankers say up to June 30 this year they will continue to keep cash reserves and statutory liquid reserves against the F.E. 31 deposits in rupees. But from July 1, 2002 they will have to keep 5 per cent cash reserves against such deposits in foreign currency at zero interest rate and 20 per cent special reserves— also in foreign currency at a monthly-determined interest rate.

At present they also have to maintain 5 per cent cash reserves in foreign currency at zero interest rate on their $1.7 billion worth of fresh foreign currency deposits mobilized under F.E. 25 scheme. They also keep 20 per cent special reserves also in foreign currency at a monthly-determined rate that is linked with the LIBOR.

Bankers close to the SBP say the return of $318 million plus foreign currency deposits to the banks by end-June will have a drawdown impact on the central bank’s foreign exchange reserves. But they are sure that increased inflows through home remittances would offset it.