11 November 2004	Thursday	27 Ramazan 1425

KARACHI, Nov 10: After keeping strict checks on foreign exchange outflows for 10 days to support the falling rupee, the State Bank on Wednesday, softened them to signal that it is still following a liberal forex regime.

The Exchange Policy Department of the SBP has told all the banks they can now entertain the requests of the importers to make advance payments to their foreign suppliers after seeking approvals from this department.

Earlier, on November 1 the central bank had stopped all banks from entertaining such requests except for the importers of industrial capital goods, plants, machinery and equipment for manufacturing excluding spare parts.

This restriction was one of the several introduced to contain the fall of the rupee. The rupee had lost 3.6 per cent value against the US dollar in October primarily due to a huge $591 million trade deficit on the back of higher international oil prices.

The EPD letter issued to all banks on Wednesday says that from now onwards they will be able to entertain the requests of the importers for making advance payments up to 50 per cent to their suppliers after seeking SBP approval on a case by case basis. It says that the requests to be forwarded to EPD must be based on evidence that the underlying transaction is bona fide adding that it must also be accompanied by bank guarantee from suppliers abroad covering the amount of advance payments to be made.

The SBP will consider advance payment up to 50 per cent of the estimated value of the imports other than those of capital goods "upon submission of evidence of bona-fides of the import transaction along with a bank guarantee from the supplier," says the EPD letter No 12. It says that importers making a request to pay 50 per cent import bill in advance will have to furnish to the banks an undertaking to produce invoice and bills of lading/airway bill within months from the date of advance payment.

The banks will pursue the matter with the importers and report those cases to the area offices of Foreign Exchange Operations Department of SBP-Banking Services Corporation, where the requisite documents are not produced within the prescribed time limit."

Sources close to the SBP say the central bank has softened the restriction on advance payment of import bills to help importers whose suppliers insist on getting advance payments and also to signal to the financial markets that it continues to follow a liberal forex regime. "The purpose (for putting some checks on foreign exchange outflows on November 1) was to ensure that the facilities (granted to the market participants) are not misused to drain out foreign exchange from Pakistan, putting undue pressure on the rupee," a senior central banker told Dawn. He said that the easing of the restriction on advance import payments would create an additional demand for dollars in the market but that would not be big enough to weaken the rupee.

This remark of the central bank official should be seen in the light of the measures the SBP has introduced from November 1. The most important of them all is that the central bank has started providing foreign exchange to the banks for financing oil import bills of their customers. The second is that banks have been refrained from making forward booking of dollars against contracts and they are now making forward booking only against irrevocable letters of credit.

The third one that the bankers say is most troublesome for them is that banks are supposed to finish foreign exchange dealings by 12:00 noon during Ramazan and by 2:00 p.m. after Ramazan.

The combined impact of all the three measures is that the rupee has recovered around 2.8 per cent of its lost value against the US dollar in 10 days, rising to 59.65 a dollar on November 1 from 61.36 at the end of October.