KARACHI, Aug 29: In July, banks in Pakistan placed $300 million more with the banks operating overseas as the State Bank’s appetite for foreign currency borrowing declined.
At end-June, $923 million foreign currency deposits of the banks operating in Pakistan were placed abroad; at end-July the amount rose to $1.223 billion, showing an increase of $300 million or 32.5 per cent, State Bank’s statistics show.
The $1.223 billion foreign currency deposits placed abroad were more than one-third of the total FCY deposits of $3.302 billion held by the banks at end-July 2005.
Local and foreign bankers told Dawn that the central bank retired most of the short term swaps it had contracted in June to borrow dollars against the rupee. As a result, the inter-bank market was flooded with foreign currency deposits and banks had to find another avenue for investing the surplus. Most of them chose to place foreign currency funds abroad.
Bankers say the SBP contracted rupee-dollar swaps worth several hundred million dollars in June whereby it borrowed dollars against rupee for one month and two weeks. The SBP contracts such swaps primarily to keep its foreign exchange reserves at a desirable level but it also results in increasing the rupee liquidity in the inter-bank market. Contracting such swaps at the end of the financial year is considered well-timed as the year-end foreign debt payments makes a draw-down on forex reserves. In June this year, oil payments by the central bank also caused a decline in the reserves necessitating the reserves augmentation by the SBP’s dollar borrowings through swaps.
From November last year, the SBP had started providing foreign exchange to banks to finance ever-rising oil import bills. Oil marketing companies pay their banks the rupee equivalent of their oil import bills and the banks in turn get the required amount of foreign exchange from the central bank in exchange of rupees. According to the data released by the Federal Bureau of Statistics, Pakistan’s oil import bill in June stood at $306 million in June. As a matter of routine the central bank provided this much foreign exchange to the bankers of the oil importing companies. Data indicating the foreign exchange spent on external debt servicing in June are not available but in the last fiscal year as a whole, Pakistan spent $2.716 billion on external debt servicing and the bulk of it ($1.821 billion) was financed through the foreign exchange reserves held with the SBP.
This means that the central bank’s reserves must have declined by at least $300 million in June on account of foreign debt servicing (if it is assumed that external debt servicing consumes equal amount of SBP’s reserves every month—which of course has not been the case).
Central bankers say the draw-down on the SBP reserves due to external debt servicing was far higher than the average monthly amount of $300 million, but they do not quantify it.
In the last fiscal year, the impact of foreign debt servicing and oil import financing was so acute that the SBP’s foreign exchange reserves went down to $9.791 billion from $10.554 billion a year ago, showing a decline of $763 million or around eight per cent. But in the month of June alone, the SBP’s rupee-dollar swaps with banks helped it keep its reserves from showing any decline. In fact net forex reserves held with the central bank increased marginally to $9.791 billion at end-June from $9.697 billion at end-May 2005.
Treasury officials of local and foreign banks say that the banks operating in Pakistan place their foreign currency deposits abroad mostly in the inter-bank market of London and New York. Sometimes they also make investment in foreign government’s short term papers particularly in US treasuries. They say that some local banks also place foreign currency deposits in their overseas branches. Senior bankers say that in the inter-bank market abroad, they were getting a handsome return equal to London interbank bid rates (LIBID) on their foreign currency placements in July.
Bankers say that in July, one-month London interbank offered rates (LIBOR) ranged between 3.34 and 3.51 per cent. As LIBID is normally a few basis points below LIBOR, banks that placed their foreign currency deposits in the overseas interbank market in July must have got a handsome return of no less than 3.25-3.40 per cent annualized return.
That return was far higher than what they were offering to their foreign currency depositors in Pakistan. Local and foreign bankers say they normally offer 1.0-1.25 per cent return on six-monthly foreign currency deposits. Most banks simply do not entertain the non-bank corporate and individual depositors desiring to keep foreign currency deposits of lesser maturity.
