August 14, 2003	Thursday	Jumadi-us-Sani 15, 1424

KARACHI, Aug 13: NBP Exchange Company — a subsidiary of state-run National Bank — has sold $2.9 million in the open market in just three days to help the rupee regain part of its lost value.

But in doing so it must have booked losses because the company being a subsidiary of NBP has come forward to lift the rupee on the instruction of the SBP ignoring commercial considerations.

A senior official confirmed to Dawn that the company had sold $2.9 million in three days to Wednesday, but he refused to say if the selling had earned it anything. “I can only confirm that we have been selling dollars aggressively and that in three days we have sold $2.9 million,” said the official.

The dollar fell to Rs58.15/58.22 for spot buying and selling in the open market on Wednesday down from its weekend close of Rs58.45/58.50. This narrowed the gap between the inter-bank and open market dollar-rupee exchange rates from 70 paisa to 40 paisa — much to the relief of SBP. On Saturday the SBP cancelled the licence of a money changer involved in currency smuggling. It also issued show-cause notices to another money changer and two money changer-cum-exchange companies involved in illegal transfers of money. The action halted the rise of the dollar in the kerb market because it had its roots in currency smuggling to Dubai.

Money changers were smuggling dollars to Dubai to make money out of the difference between the exchange rates of dollar-rupee and dollar-dirham. Insiders say the smugglers were earning 16 paisa a dollar out of this activity because of the difference in the two exchange rates. They say whereas money changers were directly smuggling dollars out of Pakistan exchange companies were short-declaring their exports of non-dollar currencies to Dubai. When they export non-dollar currencies they bring in their dollar-equivalent back home. So under-declaration of the amount of export of third currencies creates shortage of dollar in the local market and pushes up its price. Technically, it is another form of smuggling of dollars. Rules do not permit money changers to export third currencies — and only exchange companies can do that.

Insiders say as the SBP action against money changers played a role in stabilizing exchange rates in kerb so did an aggressive intervention by NBP Exchange Company. “This was nothing short of intervention,” said head of a private sector exchange company. “I know NBP Exchange has purchased third currencies at a higher rate from the money changers and sold the dollars that were brought in through their export at a lower rate.” In some cases NBP Exchange Company bought third currencies from money changers at a rate equivalent to Rs58.25 a dollar and sold the dollars received after their exports as low as Rs58.18 per unit. This loss of seven paisa a dollar translates into a considerable amount given the fact that the company has sold $2.9 million in three days.

But market sources say NBP Exchange Company was incurring a higher cost of collecting third currencies from money changers primarily because it being a subsidiary of a state-run bank has more over-heads than rival exchange companies. Private exchange companies say they are able to buy third currencies from money changers at a rate equivalent to Rs58.08 a dollar leaving enough room for them to make money even after selling the dollars received through their export at Rs58.15.

Inquiries further reveal that the company would not get any compensation for this from the SBP — and it would have to book losses on such transactions. In that case it appears far from natural for the company to continue to intervene in the market to stabilize exchange rates at its own cost.

Insiders say this sort of intervention may continue for a couple of days. Whether this intervention combined with the SBP action against money changers and exchange companies would be enough to keep the dollar from rising further is a question that only time can answer. Pakistan needs to keep the spread between the inter-bank and open market exchange rates as low as possible — or at best at zero to keep the home remittances through official channels from falling.