KARACHI, March 10: The State Bank will allow the US dollar to lose some of its extra weight this month as keeping the buck artificially stable has started hurting the exporters — for whose benefit the SBP has been defending the US currency.

“Ironically the policy of defending the buck too aggressively has started hurting the same people for whom the policy was put in place,” said a senior banker close to State Bank. He said the central bank has realized this and indications are that it would allow the greenback to lose some of its extra weight this month.

Let us see how the SBP policy of keeping the dollar above a certain level — or defending it in bankers jargon — has started hurting the exporters. Bankers say lately forward price of the dollar in all tenure has fallen below its spot price because it has been kept stable for quite some time giving rise to hopes that it would surely come down in coming months. So strong are the fears of a future fall of the buck that importers are not making forward purchases even at a discounted price.

This being the scenario the exporters who had been the prime beneficiary of the State Bank policy to defend the dollar have now become unable to sell future export proceeds to avoid taking the exchange rate loss. If this situation persists for some time it would start pinching the exporters. Though not all exporters realize this those who have enough knowledge of foreign exchange market say their community should no more insist for keeping the buck stable through artificial means.

“There is a limit to every thing,” said a big textile exporter well-versed with the nitty-gritty of the foreign exchange market. “Keeping the dollar stable for too long a period has resulted in the situation where the forward premiums have turned negative — threatening to hurt us,” he remarked.

Exporters do realize that letting the dollar some extra weight now is also going to hurt them in a way — that is it would reduce their current export earnings to some extent besides impacting on their competitive edge over the rivals.

But bankers say since the SBP would allow the buck shed extra value in phases — and not at once — the exchange rate loss to the exporters would be limited. On the other hand if the SBP keeps the dollar still stable by continued aggressive dollar buying from banks “one day the bubble will burst” — forcing the dollar to a unmanageable low all of a sudden.

Exporters have been used to selling future export proceeds at a premium in times when the rupee used to shed value against the buck as a matter of routine. But even after the things changed for the better — in the wake of 9/11 they did not stop it though the premiums started falling as the fears of rupee depreciation were mitigated by unusually higher inflows of foreign exchange.

Selling future export proceeds or discounting the export bills — in bankers jargon — enables the exporters to meet their day to day cash requirements. Hence the continuation of the practice.

According to the State Bank statistics the stock of overdue export bills was minus $91 million at end-December last year. This means exporters had made a net export bills discounting of $91 million between July-December 2002.

Top bankers close to SBP say the central bank’s high-ups have realized this and several other negative aspects of keeping the dollar in oxygen tent for too long. They say it is in this background that the central bank has decided to slow down its US dollar buying from the inter-bank market to let the greenback lose some of its extra weight.

SBP officials decline to comment on this issue but top bankers say they have got indications that the central bank would not defend the dollar as aggressively in March as in the previous months.

The bankers say Adviser to Prime Minister on Finance Shaukat Aziz has been apprised of the problems facing the banks due to an over-valued dollar. “The adviser has assured us that while keeping the dollar stable at a certain level the SBP would not ignore its fallout on the banks operations,” said head of a local bank. Aziz had met top bankers in Karachi during his weekend visit and asked them to expedite credit disbursement to avoid booking losses on their books due to falling yield on government treasury bills.

Aziz could not be reached immediately for his comments. Senior bankers say SBP high-ups have also passed on a word down the line that the policy of defending the dollar should be revisited in the light of emerging inter-bank market situation. This is a reference to forward premiums turning negative and thus threatening the exporters as well as to rising level of liquidity partly due to aggressive dollar buying by the central bank.

“So on both counts there is a case for having a new level to defend the dollar at,” says a senior banker close to SBP. But naturally nobody knows what this level would be. The SBP has already shown a shift in its policy by letting the dollar trade below Rs 58 these days and by minimising its dollar buying from the banking system in March.

Bankers say the central bank that purchased more than $310 million in January-February this year has bought only $40 million so far this month. These bankers say in addition to the factors discussed above an IMF observation on the State Bank policy of excessive dollar buying from the system has also led the central bank to revisit this policy.

The IMF while approving the fifth tranche of poverty reduction and growth facility early this month observed that the policy was proving costly “as rupee funds being spent to buy dollars from banks was but “a non-priority expenditure.”