KARACHI, Jan 13: The State Bank made a net purchase of $1.145 billion from the inter-bank market in the first quarter of this fiscal year against only $28 million in the same period of last fiscal year. Since this was done mainly to keep the exchange rate stable the exporters foreseeing a stronger rupee in near future made heavy forward selling of their export proceeds. This lowered the forward premiums on dollars thus benefiting the importers as well. Banker say the process goes on.
This highest quarterly purchase to date was made primarily to keep the exchange rate stable. Bankers say unlike in the past the foreign currency inflows were so huge during July-September 2002 that SBP was not required to inject dollars into the market.
Until June 2002 the SBP was buying dollars from money changers to fill the mismatch of inflows and outflows in the inter-bank market. Whereas the inflows came mainly through home remittances and increased foreign direct investment “the outward cash flows were weak due to a low trade deficit and smaller debt servicing payments,” says the SBP’s first quarterly report. What lessened the burden of debt servicing was the retirement of expensive debt and liabilities as well as the Paris Club rescheduling.
While the SBP did take advantage of the higher flows to build up its forex reserves it also deliberately allowed the exchange rate to strengthen by purchasing only at relatively low rates.
“This was in accordance with the SBP policy objective of allowing exchange rate to reflect the changing fundamentals of the forex market through a process of gradual adjustment.”
The evident improvement in Pakistan’s external sector and the consequent expectations of a rupee appreciation led to increasing interest by exporters in forward sales of their receipts. Bankers say many a exporter have sold upto one year of forward export proceeds. Consequently the forward premium declined significantly reflecting that expectations of a rupee appreciation were so high that exporters were ready to incur interest losses to avoid exchange rate risk. Bankers say exporters still continue to make forward sale of export proceeds.
On the other hand low forward premiums raised the incentive for banks to conduct sell/buy swaps to arbitrage rupee/dollar interest rate differentials in the first quarter of this fiscal year.
Senior bankers say they foresee further downward adjustment in the dollar value due to continued inflow of home remittances. But they say since the foreign exchange market has been liberalized to a great extent and more liberal outflows can now take place the fall of the dollar may be not be very huge. Some bankers believe that the dollar may fall below Rs58 within a few weeks. Right now the dollar is hovering around Rs58.25/ Rs58.30 in the inter-bank market.
