January 31, 2006	Tuesday	Muharram 1, 1427

KARACHI, Jan 30: The State Bank on Monday abolished the fixed mark-up rate for commodity operations and set KIBOR as benchmark for the new rate. The move reflects that the SBP wants to rely more on market-based interest rates instead of providing subsidy or influencing the interest rates.

The central bank issued a circular carrying the changed procedure for the commodity operations which had been used by the government to import some basic commodities like wheat and sugar.

The mark-up rate for financing to the federal and provincial governments and their agencies by the banks was fixed by the SBP from time to time and last revision was made in February 2003.

Bankers said that the decision to use KIBOR (Karachi Interbank Offered Rate) would strengthen the market-based mark-up trend. However, they felt that the government did not need loans for commodity operations in near future.

Analysts said that the government had been retiring the loans it borrowed for commodity operations. They said that the information about the major crops like wheat, sugarcane, etc., were satisfactory which means that no need of loans for commodity operations.

Since July 14 to January 14, 2005-06, the government retired Rs15.787 billion owed to it under the commodity operations. However, the stock of loans under the same head till June 30, 2005 was over Rs87 billion.

The SBP has been encouraging transparency and promote consistency in the market based pricing and improved management of the market risks undertaken by the banks. Last year the SBP had issued a circular advising all banks and Development Financial Institutions (DFIs) to use KIBOR of different tenors as a benchmark rate for determining pricing of all rupee-based corporate and commercial lending to their clients.

The SBP had fixed 9.5 per cent rate for commodity operation in February 2003 and since then no change was made in it.

Now the mark-up rate for financing provided by the banks to the governments and their agencies under commodity operations would be negotiated bilaterally on the basis of KIBOR of relevant tenor.

“The instructions issued to the banks through which mark-up rate of 9.5 per cent was fixed have been withdrawn,” said the SBP circular.

Analysts said that the current KIBOR rates were not much different from the fixed rate of 9.5 per cent which means that the government and their agencies would not face difficulty to get money for commodity operations.

On Monday the KIBOR rate was about 9.2 per cent but the rate fluctuates and reacts when pressure comes in the market.

In the presence of tight monetary policy being followed by the SBP, there is little room for interest rates hike in the near future as inflation has been kept below the KIBOR. However, KIBOR might receive some pressure once the government decides to get loans for commodity operations.