KARACHI, Jan 1: The US dollar lost Rs 1.70 or 2.8 per cent of its value against the rupee in the inter-bank market during the first half of this fiscal year. On Tuesday (December 31) the greenback closed at Rs 58.35 in ready value down from Rs 60.05 on the last working day of June 2002.

The US currency would have shed more of its value against the rupee had the State Bank not defended it for the benefit of the exporters. In its first quarterly report for the current fiscal year released on Monday, the SBP does admit that it allowed only a gradual rise in the value of the dollar as it had done in July- September period. The central bank says this was done to avoid abrupt adjustments. The rupee went up on the back of “continuing increase in foreign exchange inflows; the need to pass on the benefit of a stronger rupee to the broader economy and decreasing vulnerability of exporters.”

Bankers link this decreasing vulnerability of exporters to the exchange rate fluctuations to rising offtake of foreign currency loans. Though some exporters particularly smaller ones say their bankers refuse to give them foreign currency loans many big and medium size exporters admit easy access to these loans. Bankers say part of the foreign currency loans taken by the exporters or others return to the banking system as home remittances—thanks to their connections abroad. So the falling value of the dollar does not disturb them because they encash the remittances into rupees. On the other hand those getting foreign currency loans from the banks need to worry about a decline in the rupee value.

Senior bankers say whereas the SBP seems set to continue to defend the dollar it would allow the greenback fall gradually because the US unit is still over-valued vis-a -vis the rupee. But what may still keep the dollar from a free fall is the fact that the central bank has further liberalised the forex market allowing pre-payment of private foreign loans and permitting the banks to undertake less than one-month forward transactions. The restrictions on travel quota have already been eased. These and some other measures are likely to keep the demand for the dollar from falling too low. Besides a rising trend in the imports of the raw materials used in export-oriented industries may also be helpful in keeping the dollar from witnessing abrupt free falls. On the other hand if the home remittances keep up the rising trend in the coming months and foreign exchange reserves keep going up—and chances are that this would happen—then it would be difficult for the already over-valued dollar to stay firm.

Opinions are divided on how fast the dollar might be allowed to find its real worth: Some believe that the State Bank should minimize its support to the dollar because for them the increase in the rupee value is more important for the debt-laden Pakistan whose exports rely heavily on imported raw materials than any other thing.

But others feel that the level of support to the dollar should be enough to keep the exporters competitive in the world markets for that is a long-term solution of foreign exchange crisis. They say it is necessary for the export-oriented industries whose cost of inputs are too high. They say the exchange rate subsidy should not be abolished until banks lending rate falls to a single digit and the energy and fuel prices stabilize—both in the local as well as the world markets.

In fiscal year July/June 2001/02 the dollar had fallen by 6.25 per cent against the rupee.

KERB MARKET: In the kerb market the US dollar lost Rs 2.10 or 3.6 per cent of its value against the rupee in the first half of this fiscal year.