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KARACHI, Feb 20: The State Bank policy to keep the inter-bank market fairly liquid is also aimed at enabling the banks to meet any eventuality in case the US attacks Iraq. But this does not mean the central bank fears a drawdown on rupee deposits —or for that matter on foreign currency deposits.
“Keeping the market liquid is not directly aimed at preparing banks for any specific situation but it is always good if banks have enough cash ahead of any crisis,” said a senior SBP official who declined to be identified. “The SBP has so far not chalked out a specific contingency plan with regard to the threat of war in Iraq but our policy to keep banks liquid and check volatility in exchange rates is going to help banks overcome any situation.”
Bankers do agree. “These are the two corner stones of a good contingency plan and the SBP has already put both in place,” said treasurer of a local private bank. “In case the US attacks Iraq and Pakistan also gets into some problem in one way or the other there is no reason for the public making a run on the deposits.”
But a senior foreign banker reached by Dawn said he would not rule out the possibility that the foreigners staying in Pakistan may transfer foreign currency deposits abroad in case there is some problems here in the wake of a war.
HIGH RESERVES: What dilutes fear of this and other war-related drawdown on foreign currency deposits is the fact that Pakistan now has more than $9.5 billion foreign exchange reserves equal to import bill of a little less than a year.
Some bankers say the actual reserves are even higher because the $9.5 billion does not include $700-$800 million worth of foreign currency deposits adjusted against trade financing by banks out of foreign currency deposits.
Treasurer of a large local bank said the branches of his bank in the Gulf might also need additional foreign currency as in case of US attack on Iraq they might experience some drawdown on their deposits. “We have made arrangements to meet any demand of additional stock of foreign currency from our overseas branches,” he said when reached by Dawn over phone.
Treasurer of leading local and foreign banks told Dawn all of them were prepared to keep enough cash available not only with their overseas branches but also with local branches ahead of a possible crisis. “Luckily all banks have enough liquid assets these days in the form of government securities which could be used for generating cash any time,” he said. Bankers said they were not anticipating a slowdown in inflow of foreign exchange in case US went to war with Iraq. “In that event overseas Pakistanis living anywhere in the world would surely transfer more money back home instead of holding it abroad,” said a bank’s treasurer.
Advisor to PM on finance Shaukat Aziz had also made a similar statement the other day. But economist Dr Javed Akbar Ansari fears that a US war on Iraq could impact negatively on inflows of foreign exchange. “Much would depend on how the war impacts on the earnings of overseas Pakistanis particularly those in the US. In case the earnings fall then we may see a decline in inflows.”
He further said whereas expats would keep sending money back home for consumption purposes even in case of a war the investors whether expat Pakistanis or others would shift somewhere else as they would feel insecure in a country taking sides in the war.
Some bankers also endorse this view but others say all this seems to be a bit out of place because even if the US goes to war with Iraq (which is not quite certain) the war would be very short.
INTEREST RATES: Whereas bankers are not much worried about the liquidity and exchange rate issues in case of a possible breakout of war between US and Iraq they fear that interest rates would surely come under pressure. Bankers say this time around interest rate seems an area of concern. “Because in case of a war oil prices would shoot up further (they have already been on the rise on war speculations) and a consequent rise in inflation would keep the interest rates high,” said treasurer of a local private bank. The interest rates are currently much lower than in the past because of the expansionary monetary policy being pursued by the State Bank.
