June 11, 2007	Monday	Jamadi-ul-Awwal 25, 1428

On June 8, the rupee closed at 60.65 a dollar in the inter-bank market, up from 60.73 on May 31 as foreign exchange inflows in portfolio investment swelled. In six days of June net inflow in special convertible rupee accounts totalled $79 million, of which $60 million came from the USA. Between July 1, 2006- June 6, 2007, total net inflow in these accounts stood at $829 million of which $643 million or more than 77 per cent came from America.

Bankers said healthy inflows of foreign exchange enabled the State Bank to buy dollars from banks. They estimated that during the week under review the central bank bought around $100 million. The SBP said in its third quarterly report that in July-March FY07, its net buying of foreign exchange totalled $433 million. The official numbers for April-June buying would be out in late August.

At the end of May the rupee had fallen to 60.73 a dollar but it recovered immediately and finished at 60.65 a US unit on June 8. However, between July 1, 2006-June 8, 2007, the rupee lost 0.8 per cent of its value against the dollar. In a sharp contrast, the Indian rupee made a massive gain of 11.8 per cent during this period.

The Ministry of Commerce cites stable rupee as a key reason for a nominal growth of 3.5 per cent in exports in 10 months of this fiscal year. But Prime Minister Shaukat Aziz does not buy it. He recently told his cabinet colleagues that the exporters should rather take the advantage of the big appreciation in the Indian rupee.

Bankers said that as the rupee firmed up against the dollar and as the central bank mopped up big amounts of liquidity through auctions of treasury bills and long-term Pakistan Investment Bonds, banks remained short of cash. They said banks had to borrow overnight funds from SBP’s discount window to meet day to day demand for cash. On June 8, banks resorted to a heavy discounting of Rs18 billion.

During the week, the State bank sold Rs15 billion PIBs in the last auction of this fiscal year. The central bank set the yield on the benchmark 10-year PIBs at 10.12 per cent, lower than the 12.13 per cent yield it had set on April 21. Since PIBs yields are used to determine the rates of return on National Saving Schemes, the government can now make a slight increase in the return on 10-year Defence Saving Certificate or DSC. Currently DSCs offer an annualised return of 10 per cent.

The central bank also siphoned off Rs43 billion at the second last auction of treasury bills of this fiscal year. It also slightly increased the yield on one-year T-bills by just two basis points to 9.12 per cent but left the yield on the benchmark six-month bills unchanged at 8.9 per cent.

During the week under review the SBP released the data on lending and deposit rates of banks. Average return on bank deposits remained unchanged in April at the March 2007 level of 3.92 per cent, but average lending rate inched up from 11.29 to 11.30 per cent. The resultant bank spread was 738 basis points, which experts say is quite unsustainable.

The banking spread was the highest—842 basis points in case of foreign banks: their average deposit rate was 5.44 per cent and average lending rate 13.86 per cent. Local private banks that compete closely with the foreign banks had a much lower spread of 746bps with their average deposit and lending rates at 3.83 per cent and 11.29 per cent respectively.

Meanwhile, credit retirement by the private sector during last month and higher-than targeted borrowings by the government resulted in lower credit disbursement to the private sector. According to the data released by the SBP private sector’s borrowing from banks totalled Rs271 billion between July 1, 2006-May 26, 2007, down 21 per cent from Rs343 billion in a year-ago period. Full fiscal year credit off-take might remain below Rs300 billion against the target of Rs390 billion.

The government sector borrowing for budgetary support stood at Rs198 billion between July 1, 2006-May 26, 2007, more than three times its borrowings of Rs63 billion in a year-ago period. Full year target of government borrowing is Rs120 billion. But sources in the Ministry of Finance say that meeting the target seems too difficult as the pre-election spending has been on the rise.

— Mohiuddin Aazim