July 16, 2007	Monday	Jamadi-us-Sani 30, 1428

Banks remained flushed with foreign exchange throughout the week that ended on July 13 and foreign exchange reserves rose to a new all-time high of $15.63 billion on July 7. The State Bank, taking advantage of growing foreign exchange, amended its November 2004 decision of selling dollars to banks to finance oil import bills.

The central bank asked them to buy part of their requirement including the dollars needed for financing imports of furnace oil from the inter-bank market. But the decision did not have an adverse impact on the health of the rupee for the time being: the rupee closed at 60.37 a dollar on July 13 — unchanged at the last weekend closing.

But bankers say since the move has created more demand for dollars it might impact the rupee if the foreign exchange inflows lose steam in coming weeks, for two reasons.

First, the State Bank is now trying to minimise its net selling of foreign exchange to keep the rupee stable as it is inviting criticism from the IMF. And secondly, international oil prices have reached 11-month highs (London North Sea Crude at $77 a barrel and New York Light Sweet Crude at $73 a barrel) threatening to widen the trade deficit.

But bankers say in addition to traditional inflows through exports, foreign investment and remittances from overseas Pakistanis, payment by telecommunication companies in foreign exchange for renewal of their licenses is also keeping the rupee stable. During the week ending on July 13, the inter-bank market received a substantial chunk of foreign exchange from a foreign telecom giant that paid the first installment of its licence renewal fee of a little less than $300 million.

Huge forex inflows into the banking system continues to push up rupee liquidity levels making it quite a challenge for SBP to siphon off additional liquidity from the system to keep monetary expansion in check. (Overnight lending rates remained soft in the inter-bank market throughout the week and oscillated between 3-5 per cent at the end of the week on July 13).

During the outgoing fiscal year, monetary expansion of 17 per cent against the target of 13.5 per cent was partly responsible for a high inflation of 7.8 per cent against the target of 6.5 per cent.

For the current fiscal year the inflation target is 6.5 per cent but the monetary growth target is yet to be fixed.

During the week under review, the SBP closed the doors of three-day repo facility on investment banks and development finance institutions and asked them to borrow from commercial banks when in need of liquidity. The move would help in keeping the liquidity levels from rising too high in the inter-bank market and thus keep interest rates stable. That is a must to continue sending signals about a tight monetary policy stance and keep inflation within tolerable limits.

The central bank is likely to announce its monetary policy for July-December 2007 towards the end of this month and in all likelihood it would not drop its guard against soaring inflation.

“As interest rates have reached high levels, SBP may not raise repo rate but it would certainly use other tools to continue a tight monetary policy,” said a senior central banker. At the end of May 2007 average lending rate shot up to 11.32 per cent—much to the chagrin of businesses that complain that it is hurting their growth prospects.

High interest rates in FY07 were partly responsible for lower private sector credit off-take. Upto June 31 FY07, private sector’s borrowing from banks totalled Rs291 billion indicating that on June 30 it could have touched Rs300 billion against the target of Rs390 billion.

During the week under review, the SBP released latest data on sectoral credit flow, which showed that growth in personal loans including consumer finances substantially fell in eleven months of FY07. In July-May FY07 banks offered Rs52 billion personal loans down 62.7 per cent from Rs84.6 billion in July-May FY06.

And within consumer financing the sharpest decline was seen in car financing. In eleven months of FY07 banks made Rs10 billion car financing whereas in eleven months of FY06 they had offered three times more—Rs30.4 billion.

Senior bankers identify high car financing interest rates and low demand for automobiles as two key reasons for this slump.—Mohiuddin Aazim