Whereas the rupee remained range-bound between per dollar during the third consecutive week ending on June 22, the declining foreign exchange reserves leave it exposed to volatility.
Pressure is mounting on the balance of payments due to external debt servicing. There are other reasons, of course, like low foreign investment and an almost year-long suspension of the huge US coalition support funds. The current account, which is an indicator of immediate health of the external sector, is in deficit and the deficit has risen in the second half of this fiscal year.
“We’re not surprised by decline in forex reserves, we know that the central bank has so far managed the drawdown (on the reserves),” remarked treasurer of a foreign bank.
“In addition to the country’s own external debt servicing, corporates’ external debts are also being repaid timely,” he said citing some examples of latest corporate debt servicing including cases of two oil and gas sector companies. Foreign exchange reserves have been on the decline for past several weeks. On June 15, the reserves fell to less than $15.1 billion from $15.4 billion a week earlier.
Bankers say taking a hit on foreign exchange reserves for meeting external sector obligations or for containing exchange rates volatility should be seen in context of overall economic situation. “If such moves are aimed at allowing the economy the required space to continue to grow they make complete sense,” says president of a local bank.
“Bankers normally don’t panic when forex reserves of the central bank go down. Our concern always relates to availability or otherwise of foreign exchange on a given day. That’s why you didn’t see any unusual activity on forex counters during last three weeks,” said a forex dealer at one of the top five commercial banks.
An official of state-run National Bank said if the rupee remained range-bound also in the last week of June “chances for which are positive” it would help the government accounts by way of keeping “the year-end rupee-cost of the stock of external debts” under check.
He and other bankers avoided commenting on whether the recent decline in the SBP’s forex reserves was because the central bank was providing any support to banks that were short of dollars. But sources in interbank market said they had heard of such activity lately.
As a matter of routine, SBP keeps its presence in the forex market but central bankers say even if they sometime buy or sell dollars the activity is aimed at smoothening out exchange rate volatility rather than supporting the local currency. Last month when exchange rates volatility was visible that finally led to over three per cent depreciation in the rupee value, the SBP was not seen making net dollar selling in the market.
Meanwhile, during the week ending on June 22 the central bank auctioned about Rs49bn worth of three-year Ijarah Sukuk or Islamic bonds through designated banks or primary dealers. This brought the total sale of Sukuk in the last quarter of FY12 to about Rs79 billion—far more than the targeted amount of Rs50 billion. Bankers say that larger participation of banks in Ijarah Sukuk auction was because of excessive liquidity available with Islamic banks. “Selling Sukuk above the targeted amount shows increased interest of the market in Islamic debt instruments,” said an executive who oversees Islamic treasury operations of a commercial bank.
“The underlying assets (that were corporatised to provide the basis for issuance of Ijarah Sukuk in the last quarter of FY12) still leave room for further investment in them,” he said recalling that the assets were worth in excess of Rs126 billion. Investment is Sukuk is important also from the government debt management point of view because they provide an alternate for three-year treasury bills and Pakistan Investment Bonds of the same maturity.
“Compared to TBs and PIBs, Sukuk stocks are leaner. When more money is raised through Sukuk it enables the government to meet part of its short-term borrowing requirement through medium-term instruments. That ultimately keeps the immediate cost of borrowing under the desired levels,” explained a money market dealer at an Islamic bank.
Sukuk market worldwide is expanding faster than traditional financial tools of borrowing mainly because Islamic bonds are more secure from investors’ point of view than traditional debt instruments.
Senior bankers say that the recent downgrading of fifteen of the world’s largest banks by Moody’s would give further boost to Islamic bonds market. “It is high time we moved forward to catch up with new opportunities,” said senior executive of an Islamic bank. “The market has now become more familiar with the Ijarah Sukuk model. I foresee some private issues of Islamic debt instruments by the corporate sector,” he said. —Mohiuddin Aazim