August 8, 2003	Friday	Jumadi-us-Sani 9, 1424

KARACHI, Aug 7: The US dollar keeps on gaining weight against rupee in the open market amid fears that the rising gap between official and open market exchange rates may contain the growth of home remittances. But the State Bank is yet to play its part in reining in the galloping greenback in the open market—thanks to irregularities of all sorts: creation of fake export invoices and over-invoicing of export bills; mis-declaration in export of non- dollar currencies to Dubai and capital flight for whitening of black money to some extent.

Currently the dollar is selling in the open market at 75 paisa higher than its official exchange rate i.e. close to Rs58.55 against the inter-bank rate of around Rs57.80. Senior bankers say they fear that this can lure back overseas Pakistanis into their past practice of sending part of their earnings back home through kerb market to get a better exchange rate. If this happens, and home remittances start falling it would have an adverse impact on Pakistan’s balance of payment that saw a $4 billion plus current account surplus in the last fiscal year, primarily due to a big jump in home remittances.

Home remittances or money sent back home by expat Pakistanis jumped to $4.2 billion in July/June 2002/03 from $2.4 billion a year earlier as the spread between the official and open market exchange rates vanished gradually in the post 9/11 scenario.

The ministry of finance is concerned about it and one of its senior officials has been in touch with the SBP to see what could be done to stop the dollar from rising too high. Market sources say the dollar has been on the rise in the open market primarily because the exporters have started over-invoicing and in some cases they are also submitting fake invoices to get rebate. “I would not challenge you, and rather endorse this view,” said a former chairman of SITE Association of Industry while talking to Dawn. He declined to be quoted for obvious reasons but discussed with Dawn in detail how the exporters were over-invoicing exports particularly to the UAE.

He said a top economic manager had said during a meeting in Karachi with yarn merchants last month that he knew of cases of fake invoices and over-invoicing for the sake of seeking export rebates. But businessmen seem divided over whether the practice of over-invoicing should be ignored to help exporters compete with their Indian rivals who too are known for this or should this be stopped. “I do not think that over-invoicing of export is doing the country much harm. The government should not make it an issue,” commented a leading industrialist who too confirmed this.

But the fact remains that this not only makes export figures look artificially high but also threatens to lower home remittances by expanding the gap between the official and open market exchange rates.

Bankers and currency brokers say mis-declaration of export of non-dollar currencies by exchange companies is also one of the reasons for creating shortage of dollars and thereby pushing up its price in the kerb market. They also say that smuggling of currency has also been on the rise for some time—thanks to the connections of a leading Karachi-based money changer in power corridors. A close relative of a major political figure from the Punjab currently part of the coalition government is said to be patronizing a Karachi-based money changer involved in currency smuggling. “That makes the task of stopping currency smuggling all the more difficult for the Customs and FIA,” commented an insider.

A senior central banker who declined to be named told Dawn that Exchange Policy Department and Exchange & Debt Management Department of the SBP had taken strong notice of an artificial rise of the dollar in kerb. He said the SBP inspectors were busy investigating the affairs of the exchange companies and money changers—and if any irregularity was unearthed the exchange company or money changer would be dealt with sternly. “We have been issuing verbal warnings to money changers and exchange companies regarding the market behaviour but we cannot take any action unless we have some proof,” said another central banker.

There are half a dozen exchange companies operating in the country. In addition this hundreds of money changers—who are supposed to finally convert themselves into exchange companies or quit—are also working.

Senior bankers say many money changers particularly those in the Punjab and NWFP are also involved in currency smuggling to Afghanistan and others are encouraging people to hold cash in hard currencies like the dollar and euro. Cash holding in foreign currencies had come to a near halt—after the strengthening of the local currency in post 9/11 scenario. But frequent cuts in the bank deposit rates and returns on national saving schemes has forced many small savers to revert to the old practice of keeping dollars with them. The weighted average return on bank deposits has fell to 2.41 per cent in May this year which means that the savers are getting negative return as the inflation at end-May was still 3 per cent plus.

At the same time the government has also been slashing rates of return on NSS every six months leaving many savers especially the smaller ones who cannot enter the stock or real estate markets to hold cash. And holding cash in dollar rather than in rupee is still regarded a better option—and to some extent a status symbol. Senior bankers and currency brokers say the SBP can stop further hike of dollar in kerb by making an indirect intervention i.e. by selling dollars to the exchange companies. But there is no official word on whether the SBP would do it— and if yes when? Currency experts say the kerb market is so shallow the SBP could contain the dollar rise by selling $10-$20 million.