THE rupee recovered 66 paisa or over 0.6 per cent value against the dollar in interbank market following government’s decision to allow Nato supplies to Afghanistan after a seven-month suspension.

In the open market the local currency’s gain against the greenback was even larger—about 100 paisa or more than one per cent. Rupee finished the week on July 6 at 94 a dollar in interbank market and at 95 in the open market from 94.66 and 96.00 as on July 3.

“It is always about perception,” said treasurer of a large local bank. “We saw sort of pro-dollar sentiment-driven high pressure on rupee in May and June (when there was a surge external debt servicing). Now the rupee recovery is also driven by optimism that foreign exchange inflows would improve.”

Open market currency dealers said those who had stored dollars earlier offloaded the same fearing further fall of the greenback. “Besides, now only genuine buyers are in the market and no more speculators. This also has led to the rupee recovery,” said head of a foreign exchange company.

Some bankers linked the rupee appreciation to actual increase in the foreign exchange supplies toward the end of June. “Not only remittances’ inflow remained strong in the last week of June, foreign exchange reserves were also boosted by receipt of a loan from some multinational lending agency,” said an official of National Bank of Pakistan. Whereas remittances improved dollar supply, the loan receipt bolstered perception about the rupee’s health. Forex reserves as on June 29 shot up to $15.236 billion from $14.96 billion a week earlier.

Besides, bankers say, after the end of every quarter and particularly after one marked by rupee depreciation, exporters sell overdue export proceeds. That too is happening now following 4.5 per cent rupee depreciation in three months to June.

Pakistan’s foreign exchange reserves declined by $3 billion during outgoing fiscal year as the country had to manage repayment of debt obligations without any borrowing from the IMF in the second consecutive year.

As sovereign debt servicing is financed out of the reserves held by the central bank, the SBP reserves declined by a little less than $4 billion to $10.802 billion. On the other hand, the reserves held by commercial banks witnessed an increase of about $1 billion to $4.344 billion, limiting the decline in overall reserves to $3 billion.

“Whether reserves would remain stable depends to a large extent on how soon the US government reimburses Pakistan’s financial claims (of billions of dollars) in stuck-up Coalition Support Fund,” according to a senior SBP official. “We must also look at whether a 20 per cent growth in remittances is sustained and our trade deficit remains at manageable levels.”

Meanwhile, the government has announced that it would roll over the entire amount of investment that banks had made earlier in treasury bills whose maturity falls in July-September 2012. It said it would make a nominal additional borrowing of about Rs13bn during this quarter. “Banks are obviously happy. They would have to find ways for employing the liquidity generated through maturing T-bills to the extent they were not to be rolled over,” said a senior executive of a local bank.

Maturity of Rs1487 billion worth of previously sold T-bills is due between July and September. “Rolling over of T-bills of this much amount doesn’t mean we’re going to need such a huge amount of money to fill in the budgetary gaps. It only shows that for the time being we don’t want to return this amount of money to banks for a combination of reasons,” a Finance Ministry official explained to Dawn.

“Sometime the government coffers are dry. At other times there are issues related to domestic debt servicing and maintaining the right balance of government borrowing mix. And quite often the government is also concerned about what would happen to liquidity levels and interest rates (in case the bills are not rolled over).”

But the official admitted that expansion in overall domestic debt stocks due to frequent rolls-over of maturing treasury bills (which are of short-term in nature) is counter-productive as it keeps interest rates from falling which is now required for boosting economic growth.

If the government puts its fiscal house in order and reduces its shor- term borrowings from banks what we obtain is a natural yield curve (low interest rates for short-term and higher for long-term) and that becomes handy in attracting savings and investment. —Mohiuddin Aazim