KARACHI, Jan 24: Scarcity of liquidity due to tight monetary policy helped the State Bank to stabilize the exchange rate during the first half of the current fiscal as US dollar remained fluctuating in the range of just 16 paisa.

Targeting the exchange rate through monetary policy proved effective in the case of Pakistan where shortage of liquidity compelled banks to get their required money through liquidation of US dollars in their accounts.

Currency brokers said that the banks had been selling dollars to raise rupee to meet their immediate requirement which eased up pressure on the US currency. Banks used to sell dollars at spot and buy in forward to cover themselves but the process help stabilizing the exchange rate.

At the same time the shortage of liquidity barred banks to buy dollars from the market and increased dollar demand. Experts said that presence of excess liquidity found way to increase dollar demand which hit the exchange rate.

Hitting the exchange rate through monetary policy is not considered as perfect formula to check the exchange rate but experts said in case of Pakistan it proved effective.

They said that Pakistan being a mixed economy and the factors contributing to the GDP growth had some difference with the economic factors of the developed economies.

Currency brokers said that the dollar, the main foreign currency in demand, did not see much fluctuation in the first six months of the current fiscal.

“The US dollar was available at Rs59.74 in the first week of July while it closed at Rs59.86 on January 24, 2006,” said Asif Bhai, a currency broker.

He said the greenback found its maximum price at Rs59.90 during the span of six months while it fell to Rs59.60 for some days in the same period.

The impact could be seen through the slash in the forex reserves of the commercial banks which fell by $338 million during the six months. The SBP reserves also saw $1.065 billion decline during the same period.

Brokers said that the State Bank was not buying the greenback as it had been buying two years back to build its reserves.

However, the SBP remained in the market for stabilization of the exchange rate as it operated in two ways. The SBP remains behind the curtain and allow its nominated banks to buy and sell. The SBP buys at the spot and books the same amount in forward.

Analysts said that the negative impact of tight monetary policy on economic growth could be assessed after the end of fiscal year 2005-06. There is no sign that the flow of credit to private sector is restricted despite tight monetary policy and its borrowing might cross the target of Rs330 billion.

However, the inflation might not be under control as it is still slightly above 8 per cent and the next year target of 6 per cent looks unrealistic.

In the meeting of National Credit Consultative Council (NCCC) held on Monday the State Bank governor expressed confidence that the monetary growth would remain under target of 12.8 per cent. However, analysts said that the second half of the current fiscal would determine the exact growth.