April 18, 2008	Friday	Rabi-us-Sani 11, 1429

KARACHI, April 17: For the first time after five years, attraction for the US dollar has widened gulf between inter-bank and open market rates to Re1 per dollar, a dangerous trend which may again give birth to the old ‘back-channel currency transactions’.

While the greenback has been gaining weight against the rupee since the beginning of 2008, the open market started offering higher rates than the inter-bank rate.

The higher rates in the open market would attract more dollars and smuggling of dollar into the country through channels other than banks would be strengthened.

The US dollar was traded at Rs63.60 in the inter-bank market while the open market offered a rate of Rs64.55 to Rs64.60 on Thursday.

“For the first time after a gap of five years, the US dollar rate in the open market developed a difference of almost one rupee which is not a good omen for the country,” said Atif Ali, a currency dealer.

He said that the continuous fall of rupee against the dollar was supportive for speculators in the open market as they have shown their spikes.

The previous government had faced even the worst situation five years back which kept hampering the exchange rate mechanism of the country.

However, building up of dollar reserves and tight monitoring in respect of money-laundering protected the country’s exchange rate system.

“The reserves of over $16 billion were enough to curb any speculative move regarding the dollar rates, but the fast declining reserves and huge increasing trade deficit has provided a chance to speculators to exploit the situation,” said Mr Ali.

The trade deficit of $14 billion in the first nine months of 2007-08 could push the total to over $17 billion at the end of the current fiscal year.

Analysts said it was not possible for the newly-elected government to arrange dollars in bulk to meet the current account deficit.

They said that despite higher inflow of remittances being sent by overseas Pakistanis and not so bad volume of inflow of foreign direct investment, the current account deficit would be a record high.

The government is planning to launch dollar bonds and also to sell GDRs (global depository receipts) but time is still needed, while the requirement of huge size of deficit demands immediate remedy.

“We see reserves of the State Bank, which are actual reserves of the country, are bound to decline further in the next three months till the end of current fiscal,” said a research analyst.

He said this slippage of reserves would pave way for further devaluation of rupee against the dollar while the open market rate could go higher than the prevailing rates.