In a major move, the State Bank issued a circular on June 15, allowing banks to borrow foreign currency funds from international financial institutions and convert the same in the rupees for liquidity management.
The central bank said banks can borrow such funds up to 50 per cent of their unimpaired capital and that they can make such borrowings in dollars, euro, pound sterling and Japanese yen only.
The SBP also said that such FCY funds can be borrowed for not less than one year and that the interest rate should not exceed the relevant tenor of London Inter-bank Offered Rate plus 150 basis points. It said that banks would be required to seek SBP approval for raising FCY loans at higher rates.
The SBP said that the bank borrowing FCY funds would not be allowed to sell these funds out-rightly in the inter-bank market or to the customers. Similarly, banks cannot use such FCY funds for extending any FCY trade loan facility to its clients. Meanwhile, the rupee continued its upward movement in the inter-bank market during the week under review. On June 15, the rupee closed at 60.61 a dollar in the inter-bank market, up from 60.73 on May 31, gaining 12 paisa or about 0.2 per cent value within two weeks.
Bankers said the rupee remained firm on big inflows of foreign exchange on all accounts. The State Bank reported that on June 9 the foreign exchange reserves shot up to an all-time high of $15 billion. The most recent contributor to the reserves was $750 million obtained from the international market through the eurobonds.
Bankers said during the week ending on June 15, the demand for dollars dwindled as importers slowed down foreign exchange bookings after the announcement of the budget on June 9. On the other hand, inflows through exports, home remittances and portfolio investment remained high.
In thirteen days of June, Pakistan got $111 million in its special convertible rupee accounts, mainly for investment in the stock market. During this period, the main Karachi Stock Exchange 100-share index gained 516 points or four per cent.
Between July 1, 2006-June 13, 2007, total inflow in SCRA stood at $861 million. Bankers and stockbrokers say this amount should rise past $900 million at the end of the fiscal year on June 30.
Dealers at local and foreign banks said that higher inflows of foreign exchange enabled the central bank to make some dollar buying during the week. Had the SBP not bought dollars the rupee would have shot up to uncomfortable heights, they said adding that on June 15, the local unit briefly tested 60.56 a dollar level.
During the week ending June 15, banks remained a bit liquid and did not have to borrow overnight funds from the State Bank despite drainage of Rs23.7 billion by SBP through open market operation. Consequently overnight and short-term interest rates remained below the discounting rate of nine per cent throughout the week. And on June 15, overnight call rate closed at four per cent.
Between July 1, 2006-June 2, 2007, the government borrowing for budgetary support totalled Rs149.6 billion, leaving the full fiscal year target of Rs120 billion far behind.
But as on June 2, the government did manage to bring down its inflationary borrowings from the central bank to a net retirement of Rs26.4 billion. This happened in the backdrop of inflation rising to 7.84 per cent in July-May FY07 against full year target of 6.5 per cent.
Whereas the government is curtailing its borrowing from the central bank to keep inflation in check, the central bank has decided not to provide export refinance to banks on its own. Now, the reimbursement to banks on account of export refinancing would be made from the government accounts to avoid increase in reserve money that leads to inflation, SBP Governor Dr. Shamshad Akhtar said in an interview to a local daily.
The government’s failure to check rising food prices resulted in pushing up food inflation to 10.3 per cent in July-May FY07. But the fact that demand pressures also fuelled inflation is evident from the fact that the aggregate growth in M2 shot up to 15.44 per cent in eleven months of the fiscal year, against the full year target of 13.46 per cent.
However, the contribution of the private sector’s borrowings to M2 growth was less than normal. Net private sector borrowings from the banking system totalled Rs287 billion in eleven months against full fiscal year target of Rs390 billion. Demand for private sector credit has fallen due to a host of reasons including a slowdown in large-scale manufacturing. This has also squeezed exportable surpluses and a consequent fall in export growth.
In eleven months to May, exports increased just 3.6 per cent to $15.48 billion. But imports, during this period, grew 8.4 per cent to reach $27.74 billion. That created a trade deficit of over $12.2 billion that is likely to shoot up to $13.5 billion at the end of the fiscal year against the target of $9.8 billion.
Despite such a huge trade deficit, Pakistan has so far managed to keep its balance of payments in surplus, though the surplus itself is shrinking: the BOP surplus fell to $758 million in ten months to April 2007 from $1.327 billion in the same period of last fiscal year. —Mohiuddin Aazim
In a major move, the State Bank issued a circular on June 15, allowing banks to borrow foreign currency funds from international financial institutions and convert the same in the rupees for liquidity management.
