July 02, 2007	Monday	Jamadi-us-Sani 16, 1428

On June 29, the rupee finished at 60.47 a US dollar, up from 60.69 on June 22, gaining 22 paisa within a week. Bankers said foreign exchange inflows through the take-over of Pakistan Industrial Credit and Investment Corporation by NIB Bank put the dollar under pressure.

NIB Bank, owned chiefly by Singapore-based Tamasek Holdings took over PICIC for $342 million and the acquisition attracted about $250 million into Pakistan from Singapore. In addition to this, about $92 million inflow in the account of Warid telecom company let the rupee scale new heights during the week under review.

News that the foreign exchange reserves rose to $15.18 billion on June 20 after reaching the historic $15 billion market earlier in the month, also lent psychological support to the local currency.

With the rupee closing at 60.47 a dollar at the end of fiscal year 2007, its cumulative loss against the greenback comes to only half a per cent during the year. On June 30, 2006, the rupee had closed at 60.16 a dollar in the inter-bank market.

What kept the rupee firm throughout the year were big inflows of foreign exchange through foreign investment and remittances from overseas Pakistanis. These inflows coupled with the foreign debt raised through the Eurobonds helped Pakistan post a balance of payments surplus of about a billion dollars in eleven months to May, despite a dramatic widening of trade and current account deficits.

However, strong inflows of foreign exchange pushed up rupee liquidity levels to historic highs in the inter-bank market making it difficult for the State Bank to conducts its tight monetary policy effectively.

The central bank, however, conducted very frequent open market operations to mop up excess liquidity from the banking system. “We saw as many OMOs every week during this fiscal year as we used to see in a quarter,” remarked a banker.

He and many other bankers interviewed by Dawn said they were upset with the SBP policy of leaving the market excessively liquid at a time when it was following a tight monetary policy. They said that overnight call rates oscillated between 2-6 per cent most of the time during the week under review—and on June 29 they closed at one per cent.

A senior central banker said the SBP was conducting frequent OMOs to suck in excess funds from the system. “But perhaps because of the year-end, the participation of the banks was very thin in the OMO conducted this week.”

Bankers said what upset them most was the fact that when the rupee started rising rapidly the SBP did not buy much of dollars from banks to keep the exchange rate stable. “When the rupee falls abruptly they do sell dollars in the name of stabilizing the exchange rates. Why not stabilize it the other way round,” questioned a foreign banker.

But sources close to SBP say that since SBP is now trying not to remain a net buyer of foreign exchange in the inter-bank market, it has slowed down its forex buyings.

Meanwhile, the government has accelerated the retirement of inflationary debt of the State Bank.

The latest data show that upto June 16 this fiscal year, the federal government borrowed Rs215 billion from commercial banks. In the same period of last fiscal year, its borrowing from banks totalled just Rs15 billion.

Upto June 16, the federal government retired Rs45 billion of SBP debt. In the corresponding period of last fiscal year, it had rather borrowed Rs94 billion from the central bank.

The federal government is trying to contain its borrowing from the SBP as part of its efforts to fight inflation. Between July-May 2007 CPI inflation rose at 7.8 per cent against the full fiscal year target of 6.5 per cent.

But unlike the federal government, the provincial governments borrowed more from the central bank upto June 16 to retire the expensive commercial bank debts. The cumulative borrowing of all the four provinces from the central bank totalled Rs29 billion. In a year-ago period, they had rather retired the SBP debt of 17 billion. Between July 1, 2006-June 16, 2007, provincial governments retired Rs19 billion debt of commercial banks. In a year-ago period, they had retired Rs7 billion.—Mohiuddin Aazim