KARACHI, Aug 30: Investors seem to be renewing their forgotten romance with the US dollar that has not only been stable for some months, but promises enough charm for its lovers to hang around.

Since March this year the dollar has remained rangebound in inter-bank trading between Rs57.70-Rs57.85 showing fluctuations at times on demand and supply. Bankers say chances are that the US unit would remain stable also in near future as well though it may lose some marginal value on given days when there is a higher demand. In overall fiscal year July/June 2002/03 the dollar had recorded a significant fall of 3.6 per cent against the rupee.

What helps the dollar regain its lost charm is that people are getting a “humiliating low return”, as some call it, on their bank deposits. The weighted average deposit rate of all the banks combined has fallen below 2 per cent—sending shockwaves among the saving public in general and among small savers in particular.

This is how some top bankers explain the recent growth in the foreign currency accounts. Fresh foreign currency deposits (i.e. those mobilized after June 1999) went up to $2.353 billion at the end of July this year from $2.062 billion at the end of January showing a growth of $291 million in seven months.

“With the rupee interest rate falling to new lows and with the dollar seems set to remain stable it is but natural for people to keep money in dollars,” said a senior banker. Banks are offering a weighted average rate of return of less than 2 per cent to their depositors against annualized consumer inflation of 3.5 per cent. This has driven many savers to stock and real estate markets. “But real estate prices after having peaked a couple of months before have started coming down,” said Mr. Zubair Shaheen of real estate brokerage Pak Estate.

“Similarly expectations of gains from the stock market have started to falter,” said another senior banker. He said this to substantiate his view that the growth in foreign currency deposits indicates that people are being attracted to the dollar again.

The Karachi Stock Exchange 100-share index rose from 2545 at end-January this year to 3807 at end-July. At present it is above 4400 mark and opinions are divided if it would cross 5000. “So naturally some people find it easier to turn to the dollar that has been a traditional mode of investment in Pakistan,” said treasurer of a major local bank.

Bankers and executives of foreign exchange companies say what else shows the dollar has started attracting local investors again is that it has refused to come down despite SBP action taken against some money changers involved in currency smuggling.

But there is another viewpoint. Leading stock brokers say there is still room for rise in stocks value implying that the US unit is far from being able to attract new investors.

How on earth then they explain the buildup in foreign currency deposits? “It is possible that (parts of) the funds which came in the real estate and capital market have been parked in foreign currency deposits after having made some gains,” said ex-chairman of KSE Mr. Yasin Lakhani. But he shared the view that falling return on rupee deposits might have driven savers towards foreign currency deposits.

The weighted average rate of return on deposits of all banks combined fell to a paltry 1.90 per cent at end-June this year. Figure pertaining to July is yet to pour in. This rate stood as high as 3.21 per cent till the end of January when banks started witnessing a buildup in foreign currency deposits.

People fear — and bankers share this apprehension — that this continual fall in the rupee interest rate may lead to redollarization of bank deposits — after the stock market loses its steam.

SBP REMEDY: In the mean time the SBP is working hard to attack the root cause of the falling interest rate on rupee accounts. It is going to launch shortly certificates of deposits to suck in excess liquidity from banks. Banks flush with excess liquidity — and having been unable to find new avenues of lending have made drastic cuts in lending rates.