September 03, 2007	Monday	Sha'aban 20, 1428

Between July 1 and August 30, the rupee had lost half a per cent of its value versus dollar but a net inflow of $20 million in portfolio investment on August 30 helped it make significant gains the next day.

The rupee closed at 60.62 a dollar on August 31 showing a big overnight recovery of 14 paisa or more than 0.2 per cent. Some bankers said the supply of dollars was so strong that at one point the rupee rose to 60.56 a dollar but then a modest dollar buying by the State Bank caused it to close at 60.62 at the end of the day.

This brought the total loss the rupee suffered in July-August to about 0.4 per cent. In the entire last fiscal year it had lost a little less than this against the greenback as the SBP continued to sell foreign exchange to banks for financing oil import bills.

With the start of the new fiscal year the central bank has shifted 30 per cent oil payments onto the banks. Resultantly, the demand for dollars is up and the rupee has been on the slide.

“But there are equally strong or even stronger reasons for the rupee slide as well,” said treasurer of a local bank. He said that the central bank kept buying dollars in July and August to build reserves and fortify its capacity to intervene. So strong was the SBP buying that on particular day in August the rupee fell to 60.88 per US unit.

The central bank generally tries to keep the dollar supply at a comfortable level towards the end of every quarter when Pakistan makes large payments to its creditors. In April-June 2007 it spent $714 million on foreign debt servicing. (In the entire FY07 total debt servicing cost the nation $2.77 billion).

Besides, many multinationals remit abroad millions of dollars in profit and dividend payments.

Even local companies and commercial importers send abroad sizable foreign exchange in payments to foreign suppliers, contractors and consultants etc.

Bankers said that in July and August outflow of funds continued through the special accounts meant for facilitating foreigners and non-residents citizens to invest in Pakistan’s debt and equity markets. They said this too led to the rise of the dollar.

Between July 1-August 30, special convertible rupee accounts saw a net outflow of $191 million..

“Not that the inflows in these accounts remained low. What is worrying is that there were very large outflows, which more than offset them,” said treasurer of a bank. Between July 1-August 30 the outflows totalled $971 million against inflows of $780 million.

Bankers said that the SBP purchases of foreign exchange plus outflows from SCRA also led to a general panic dollar buying, which consequently put the rupee under pressure throughout August.

Meanwhile, interest rates remained somewhat soft in the inter-bank market in August despite a monetary tightening announced from the start of the month. The benchmark six-month KIBOR closed seven basis points up to 10.09 per cent on August 31 from its July 31 level of 10.02 per cent.

What kept KIBOR soft was a comfortable level of liquidity in the market—thanks to very low offtake of the private sector credit. No official data on banks lending to the private sector in July-August is available but senior bankers say that they have made hardly any net lending to the private sector during this period. The Private Sector Credit Advisory Committee would meet sometime in September to finalise the credit plan for this fiscal year and the SBP would start releasing monetary data afterwards.

However, banks made Rs70 billion net investment between July 1-August 30 mostly in the government treasury bills and long-term bonds as their yields improved.

Though the data on overall private sector credit disbursement are yet to be released, official sources have revealed the statistics on agricultural credit. In July 2007 banks disbursed about Rs13 billion agricultural loans up from Rs11.8 billion in July 2006.

The target for farm credit distribution has been set at Rs200 billion for this fiscal year up from Rs160 billion in the last year.

Bankers say banks would easily meet the target as the demand for farm credit has increased after the crop damage by monsoon rains and flooding. In the last fiscal year lending to farmers had exceeded the target by Rs8 billion. —Mohiuddin Aazim