September 5, 2003	Friday	Rajab 7, 1424

KARACHI, Sept 4: The gap between six-month LIBOR and six-month rupee call rates has come down from a monthly average of 2.39 per cent in January to just 0.19 per cent in August. This means that investment in rupee funds has become much less charming. Top bankers say this has alerted the monetary authorities who are now making moves to increase the spread to lure foreign investment.

Bankers say at the start of 2003 the mid point of six-month bid and offer rupee call rates was 4.20 per cent whereas six-month LIBOR or London inter-bank offer rate was 1.38 per cent. The gap between the two was 2.82 per cent. But at the end of last month the mid point of six-month bid and offer rupee call rates came down to 1.60 per cent against six-month LIBOR of 1.20 per cent. The spread between these two rates thus fell to 0.40 per cent only.

Cutting through the jargons it means that investment in rupee funds were yielding an average return of 4.2 per cent in January but in August the rate of return fell to 1.2 per cent — a big fall of three percentage points. Against this the yield on investment in foreign currency changed very little in the meantime — from 1.38 per cent to 1.20 per cent. Senior bankers say this has encouraged exporters to hold export proceeds up to maximum permissible period instead of rushing to sell them in the inter- bank market. That in turn is creating a pressure on the demand for dollar.

Bankers say that the shrinking spread between LIBOR and rupee funds may also on the inflow of foreign direct and portfolio investment with a lag of time. In July this year foreign direct investment fell to $32 million down from $42 million in July last year. Portfolio investment stood at minus 0.5 million in July 2003 showing no change over July 2002 figure that was also minus 0.5 million.

In fiscal year July/June 2002-03, however, Pakistan attracted $798 million foreign direct investment and $22.1 million portfolio investment up sharply from about $485 million and minus $10.1 million respectively. Senior bankers say there could be many reasons for the fall in foreign direct investment and portfolio investment in the month of July this year but many of them insist that shrinking spread between rupee interest rates and LIBOR is one of them.

REMITTANCES: Opinion is divided on whether the falling spread between LIBOR and rupee interest rates would also have adverse impact on the flow of home remittances or money sent back home by overseas Pakistanis. Some bankers say it would. They quote for example a sharp decline in remittances from the US and the UAE in July this year. Remittances from the US and the UAE fell to $79.5 million and to $48 million in July 2003 from $102.4 million and $58.3 million respectively.

Some bankers say the fall in remittances from the two major centres could be attributed to an increase in the hundi premium that itself was a byproduct of a shrinking gap between LIBOR and rupee interest rates.

But others say a falling gap between rupee interest rates and LIBOR should not impact adversely on remittances primarily because most of overseas Pakistanis do send money back home for immediate use — and those who send it for investment purposes get it invested in stocks and real estates, etc., where the yield is so high that the differential between rupee and foreign currency interest rates does not come into question.