March 7, 2003	Friday	Muharram 3, 1424

KARACHI, March 6: Importers now prefer to import goods mostly on deferred payment rather than for cash to get the dual benefit of lower interest rates—and higher exchange rates of the rupee.

“The importers have shifted focus from cash letters of credit or sight LCs to letters of credit based on deferred payment—or DA LCs in our jargon,” said head of credit of a large local bank.

“The obvious reason is that the importers foresee a sure fall of the US dollar in the time to come,” says head of treasury of the same bank. The public statement of Adviser to PM on Finance Shaukat Aziz that if the SBP stops keeping the dollar stable for the exporters it may fall to Rs55 has led to the shift in the importers policy. “When the top economic manager says this thing it means the dollar has to fall—if not today maybe tomorrow,” says a leading importer based in Jodia Bazar. “That is why most importers do not make forward buying of dollars now. They go for DA LCs instead,” says the importer.

Such is the importers craze for importing goods on deferred payment that they did not bother to buy forward dollars even on Thursday when forward premiums turned negative. Senior bankers said that forward price of the US unit fell significantly below the current price on Thursday. The forward price of the dollar was quoted up to below 45 paisa its ready value as banks started offloading dollar stocks anticipating that the US unit may now begin to fall. They did this in the backdrop of a one per cent plus cut in the six-month treasury bills on Wednesday that has strengthened the case for allowing the US unit to shed some of its extra weight. Senior bankers said three-month forward price of the dollar was quoted up to 35 paisa below the ready value and one-month forward premium was seen as high as minus 16 paisa.

The fact that the forward premiums have remained negative for quite some days but despite that the importers have not rushed to book forward dollars reflects a new approach of the importers towards the exchange rates. “We do not anticipate—we rather know for sure that the dollar would keep losing its worth in phases,” says one of the largest importers of plastics Naim Warind. “Why then we should go for booking forward dollars regardless of the premiums being negative or not”?

The chairman of Pakistan Commodity Importers Association Raees Ashraf Tarmohammad says so strong is the expectation for a fall in the dollar value that many importers are not opening letters of credit on cash. “In that case we have to make rupee payments at the rate of say Rs58 a dollar. But if we open LCs on deferred payment for three months or for six months we know we will have to pay lesser because the dollar would be cheaper by that time.”

This is one benefit the importers get in importing goods on deferred payment. “The other is when we import against cash LCs we have to borrow money from local banks at a high rate,” says one of the top few importers of edible oils A. Majeed Muhammad. “But when we open LCs based on deferred payment the extra money we have to pay to our supplier is normally lesser than our local borrowing cost,” he explains.

But what happens in cases when importers have to import goods from such countries where interest rates are high and as such their suppliers do demand a big margin on deferred sales? “In such a situation the importers normally ask his suppliers to ship goods from his homeland but open LCs from a third country where the interest rates are not too high,” reveals head of commercial operations of a big local bank.

“I know a number of importers who import goods from Indonesia where the interest rate are too high. What they do is to get the LCs for such imports opened through a negotiating bank in Dubai or in Singapore where interest rates are comparatively very low.”

Sources in the importers community say some very big importers who maintain foreign currency accounts abroad also manage to open import LCs directly from a third country instead of asking their suppliers to do this. In such cases the markup charged on deferred payment is still lower.

Importers say the trend to import on deferred payments would continue until the dollar comes down to its real market-based value but they say this may take a long time. “Our food import bill has gone down and the US and the donor agencies may also offer us a couple of billions of dollars in case there is a war between US and Iraq,” says Raees Ashraf Tarmohammad. “These two things combined will not only offset the likely pressure on our foreign exchange due to a buildup in oil prices but will also keep us surplus in trade account.”

He says that this in turn will naturally bring more pressure on the dollar value in our local market making it difficult to let the dollar shed all of its extra weight. He sounds logical also because allowing the dollar to find its real worth will not be possible for the government during a possible US-Iraq war because the post-war situation would surely belittle the growth prospects of exports.

Pakistan’s exports grew 19 percent to $6.9 billion in the first eight months of this fiscal year ending in February thus brightening hopes that the country may reach the full-year target of $10.4 billion.