KARACHI, July 29: The State Bank has decided to make indirect intervention into the open currency market to stop what its officials term as artificial rise of the dollar in the open market. The SBP may be doing this to ensure that the kerb premium on the dollar does not get big enough to divert part of home remittances from banking channels to the unofficial open currency market.

Sources close to the central bank say SBP officials are giving final touches to a plan to make an indirect intervention in the kerb market. The SBP will most likely sell dollars to some banks and banks will sell the same to foreign exchange companies. The exchange companies will then supply these dollars to money changers.

“For this the central bank will have to give special permission to foreign exchange companies to buy dollars from the banks,” one of the sources said. Under the rules, these companies can only sell foreign exchange to the banks — and cannot buy from them.

The sources say that the State Bank has a few hundred millions of cash dollars in its tills, part of which can be used for the said purpose. “Our kerb market is so small that even $50 million intervention would be enough to stabilize the rupee-dollar parity,” said head of a local exchange company.

The SBP had to think about intervening into the open currency market after it had noticed misdeclaratin in export of third currencies by foreign exchange companies. The exchange companies bring in dollar equivalent of the third currencies exported by them. So the inflow of dollars falls short when the export of third currencies is short-reported. Hence the rise in the dollar value in kerb market.

It was amidst this background that the greenback had shot up to Rs58.70 in kerb against the inter-bank rate of Rs57.80 or so but now it has fallen to Rs58.45.

Currency brokers say smuggling of third currencies by one or two exchange companies is not the only factor that has made the greenback dearer in the kerb market. They say the demand for dollars has also picked up. “There are traders who need to buy dollars from the kerb to realize the money earned through over- invoicing and under-invoicing in trade,” said a top official of a leading exchange company. “Besides there are those who still look towards the dollar and other hard currencies for investment purpose.”

Pakistan’s inter-bank market has been flooded with surplus liquidity primarily due to rising home remittances — or the money sent back by overseas Pakistanis. In the fiscal 2002-03 ending in June, the country got an all time high of $4.2 billion remittances.

Senior bankers say whereas part of the additional liquidity generated through the remittances is going to the stock market and real estate, a marginal amount is also being invested into hard currencies, including the euro and the US dollar. When the dollar started rising in the kerb market in late June this did surprise many as the greenback has long been abandoned by local investors and even speculators.

The appreciation of Pakistani rupee on the back of a dramatic increase in remittances after 9/11 has changed the perception about the dollar and it is no more regarded as an investment tool. During the last fiscal, the rupee gained 3.6 per cent against the dollar.

It is against this backdrop that the State Bank officials do not think that the rise of the dollar from below Rs58 until middle of June to Rs58.70 through July owes much to any increase in its demand.

They believe that smuggling of both dollars as well as non- dollar currencies is the primary reason for the current hike of the greenback in kerb. Executives of the exchange companies do admit that the recent five-fold increase in the price of betel nuts has prompted khepias (petty smugglers) to finance smuggling of the betel nuts out of the dollars purchased from the money changers.

That also explains the upward march of the dollar in the kerb market.

Customs authorities had confiscated some large consignments of imported betel nuts after labelling them as contaminated. That created a shortage of this item, pushing up its retail price from Rs200 to Rs1000 per kg.

Meanwhile, top executives of the exchange companies say they would welcome an indirect intervention in the kerb market by the State Bank.

“We would certainly appreciate it,” said Ovais Kalia of KKI Exchange Company when reached by Dawn over telephone. “We feel more comfortable when the dollar is at par or even lower in the open market than in the inter-bank market,” he said. Mr Kalia explained that when the dollar is dearer in the kerb market it makes it more difficult for the exchange companies to attract home remittances. The same is true for the banks as well. The reason why overseas Pakistanis sent back home a record $4.2 billion in the fiscal July-June 2002-03 was that the kerb premium had disappeared — in fact the dollar was cheaper at times in the open currency market than in the inter-bank market.

“If this situation does not last...we may see part of home remittances diverting from the banks to the open currency market,” said a SBP official who declined to be named. “That is exactly what we would not tolerate at any cost,” he added, implying that the central bank might have to do something to keep the kerb premium on dollar as low as possible — or preferably let it disappear once again. At present the dollar is being sold in the kerb market at a rate 70 paisa higher than in the inter-bank market.