June 6, 2003	Friday	Rabi-us-Sani 5, 1424

KARACHI, June 5: The State Bank of Pakistan made net purchase of $4.4 billion from the inter-bank market in July/March 2002/03.

According to annual Economic Survey released in Islamabad on Thursday the central bank injected into the banking system Rs257 billion against a net purchase of $4.4 billion. But more than 70 per cent of this injection i.e. Rs181 billion has been sterilized primarily through auctioning of the government securities thus keeping inflation in check—and allowing exporters to maintain their competitiveness.

The central bank purchased $4.4 billion from banks as inflow of foreign exchange had been on the rise not only because expat Pakistanis sent more money back home but also because foreign direct investment rose.

“The (SBP) sterilization has helped in containing inflation by checking the unusual growth of money supply,” says the survey. During the first three quarters of this fiscal year consumer price inflation remained low at 3.4 per cent against the annual target of 4 per cent.

“However, appreciation of Pak rupee has also contributed towards lower inflation through cheaper imports,” says the survey.

“The SBP intervention to sterilize has also arrested the abrupt appreciation of rupee from 6.7 per cent in July/ March 2001/02 to 3.8 per cent in July/March 2002/03.”

Otherwise it would have eroded Pakistan’s export competitiveness in the international markets and damaged the export-oriented industries.

COST: The sterilization also involved some cost which was to be borne by the SBP. It is the difference between higher earnings foregone on off-loaded T-bills and lower returns on SBP investment of foreign exchange.

Moreover, the SBP has also to bear the loss due to increase in the revaluation cost resulting from appreciation of the rupee against the US dollar. Resultantly, it had reduced the profit of the SBP, which is also a loss to the government as it is transferable to the government.

“However, the government will gain on account of lower borrowing cost and lower domestic debt servicing due to lower interest rates.”

The principal benefits of the SBP purchases from the inter- bank foreign exchange market coupled with on-going sterilization include the containment of monetary expansion, low inflation, maintenance of export competitiveness and lower cost of bank borrowing by the government.