November 15, 2003	Saturday	Ramazan 19, 1424

KARACHI, Nov 14: The net profit of the State Bank of Pakistan witnessed a steep drop to Rs243 million in the year ended June 30, 2003, from net profit amounting to Rs25 billion made by the bank a year ago.

The accounts unveiled by the bank on Friday, showed that the principal reasons for profit slump was a huge loss of Rs13 billion on “foreign currency placements, deposits and other accounts” and decrease of around Rs7 billion in gains on “forward covers under exchange risk coverage scheme” during the year ended June 30, 2003.

But the bank seemed unruffled by the profit downturn. In an analysis of profitability, the bank commented: “It is a well accepted fact that Central Banks do not direct their operations with the prime motive of earning profits”. And it went on to say that, however, by virtue of their sole right of issuing notes and being custodian of government’s cash balances, commercial banks reserves and the country’s foreign exchange reserves, the central banks generally hold enough income earning assets in their possession. SBP stated that it also carries out its affairs on the same pattern and in the course of conduct of its business, it sometimes makes surplus profit which is transferred to the government for budgetary support.

The bank says that its income consists of earnings in the form of interest on securities and on loans/advances to government and banks, discount on Market Treasury Bills (MTBs) issued for replenishment of debit balance of federal government, exchange gains/losses on sale and purchase of foreign currencies and commission on management of Public debt of the Central and provincial governments.

“The main items of expenditure include pay and allowances of SBP’s staff, agency charges paid to NBP for transacting government business on SBP’s behalf at places where SBP does not maintain a direct presence, printing charges for bank notes and other security documents, etc,” the bank said.

SBP terms the period between 1999-00 to 2002-03 as a “period of varying profitability.” It said that the country’s economy underwent significant changes during the last few years having wide ranging effects on a number of economic and financial areas including profitability of the SBP. “A number of such developments have impacted SBP’s profitability in recent years, which varied from Rs36 billion earned for 1999-00 to an amount of Rs243 million earned in 2002-03,” says the bank, adding that the primarily, there were two heads of accounts affecting the bank’s profitability, viz. a) Discount on MTBs and b) Gains/losses on foreign exchange.

More of that is explained by the bank at another place: “While there were benefits of a strong rupee, a swiftly appreciating exchange rate would have entailed the risk of placing country’s exports at a disadvantage,” the bank stated and added that to keep exports competitive, SBP had to mop up excessive liquidity from foreign exchange market, resulting in a continuous accumulation of country’s foreign exchange reserves.

“Consequently, the foreign exchange reserves of the country reached a historic level of approximately $9.53 billion as on June 30, 2003, which was a phenomenal increase in comparison to the past when the country was faced with chronic shortages in its reserve volumes.

The rupee witnessed an appreciation of approximately 3.70 per cent during the year ended June 30, 2003.” And the Bank stated that while there were several benefits of maintaining a high volume of foreign exchange reserves, it had its own repercussions on profitability of the SBP. The foreign exchange reserves held with the SBP were carried at the cost at which they were purchased from the market.

Subsequent changes in the exchange rate affected SBP’s profitability when the balances were revalued on market-to-market basis as per the International Accounting Standards (IAS).

Previously, when the rupee was depreciating, SBP realized exchange gains on its Gross Foreign Assets although due to the fact that bank’s foreign liabilities far exceeded the net foreign assets, the net impact on bank’s profitability remained negative in the form of a net exchange loss, the bank observed.

The bank said that, however, when the rupee took a reverse turn and started appreciating sharply, SBP as per the requirements of IAS had to book revaluation losses on its gross foreign assets since the prevailing exchange rate in the market at the year end was less than the rates at which purchases were made.

Moreover, the Net foreign assets position of the bank also remained positive due to the unprecedented increase in foreign exchange reserves held, adding further to the net exchange loss. “On the other hand, interest rates in the international foreign exchange market were on declining trend and SBP’s income on its investments of foreign exchange assets was, therefore, significantly lower,” the bank said.