As anticipated earlier, the rupee crossed the 60.60 a dollar barrier in the inter-bank market during the week ending on May 12. The rupee rose to a new high of 60.51 a dollar at the weekend, gaining five paisas during the week.
The central bank made some dollar buying during the week to keep the rise of the rupee within a certain band. A source close to the SBP said the central bank would continue this practice to prevent volatility in exchange rates.
In ten months of this fiscal year, the rupee lost 0.8 per cent of its value against the dollar. But in two weeks of May it has gained 0.2 per cent against the US unit on strong inflows of foreign exchange. Senior bankers say the inflows continue and chances are that the rupee would strengthen further before the close of this fiscal year on June 30. This seems possible because despite a dramatic increase in the trade and current account deficit, Pakistan’s overall balance of payments is still in surplus. In nine months to March 2007, BOP was surplus by $373 million but the volume was much lower than March 2006 surplus of $745 million.
Many fear that the balance of payments may turn negative in the next fiscal year and that may weaken the rupee. A senior official of the ministry of finance said though the next fiscal year might be difficult to manage external sector imbalances, there is still hope for improvement.
He said the government is likely to propose certain measures in the next budget to boost exports and contain tertiary imports, to reduce the trade deficit. In ten months of this fiscal year, the deficit reached $11 billion, leaving behind the full year target of $9.4 billion.
Government officials say foreign investment would keep their present pace through the next fiscal year. But critics point out that it would prove difficult in the wake of the Supreme Court’s judgment against Steel Mills privatisation and in the backdrop of rising political heat prior to elections.
In nine months of this fiscal year, foreign direct investment including privatisation proceeds totalled $3.8 billion, up from $2.2 billion a year-ago. During this period, portfolio investment (including OGDC GDR of $731m) totalled $1.7 billion against $1 billion in the same period of last year.
Workers remittances, or foreign exchange sent back home by overseas Pakistanis, have also risen to $3.9 billion in nine months of this fiscal year from $3.2 billion in a year-ago period. Unlike, foreign investment, the inflow of which is more vulnerable to policy changes and political temperature in Pakistan, workers’ remittances can show a reasonable growth in the next fiscal year as well.
But on the other hand, the government’s foreign debt servicing would also increase due to the buildup in the volume of foreign loans and liabilities in the past few years.
So, on balance it looks as if the rupee would neither make a big gain nor experience a huge loss in FY08. Sources close to SBP, say the central bank would continue to keep exchange rates stable by injecting or draining dollars from the market as the case maybe.
Already the SBP continues to sell dollars to the market to pay oil import bills.
Meanwhile, interest rates remain high and banks are currently facing a liquidity shortage. So acute was this shortage that in the week ending on May 12 the banks twice resorted to the SBP discount window—first on May 10 to borrow Rs12.6 billion and then on May 11 to borrow Rs27.5 billion.
The high levels of Karachi Inter-bank Offered Rates or Kibor reflect the upward movement of interest rates. In ten months of this fiscal year, benchmark six-month Kibor rose 62 basis points, from 9.61 per cent at end-June 2006 to 10.23 per cent at end-April 2007.
Since most of the corporate loans are tied with Kibor, this rise in the benchmark has made bank loans of various kinds expensive.
The weighted average lending rate of banks also went up 89 basis points in nine months of this fiscal year, rising from 10.40 at end-June 2006 to 11.29 per cent at end-March 2007. Since the SBP continues to pursue a tight monetary policy to contain inflation the rates may rise further in FY08.
The higher interest rates in this fiscal year have also resulted in lower off-take of private sector credit. Between July 1, 2006 and April 28, 2007 the private sector borrowed Rs274 billion from banks, down from Rs345 billion in the same period of last fiscal year. The government is likely to set the indicative target of private sector credit at par or even lower than this year’s target of Rs390 billion. “But a final decision is yet to be taken,” said a source involved in setting this target.
It was during this fiscal year that the government once again started auctioning long-term Pakistan Investment Bonds and also re-allowed institutional investment in National Saving Schemes. Both moves were aimed at increasing the government borrowing from banks and non-banking sources rather than from the central bank. The first move was also aimed at resetting a benchmark interest rate for long term investors.
Sources in the ministry of finance say the government would continue to hold PIBs auction regularly in the next fiscal year. He also said that either institutional investors would be allowed to continue investing in existing NSS or a new special product would be designed for them.
The move to re-allow institutional investment in NSS has raised overall inflows. Data released by the SBP on May 11 showed that net inflow in NSS totalled Rs44.6 billion in nine months of this fiscal year.
