KARACHI, Oct 18: The dramatic decline in the gap between inter -bank and open market foreign exchange rates is driving people do this: many of them are buying dollars from the kerb market and putting them into bank deposits.

It seems illogical on the face of it. Because the price of the dollar is still higher in kerb than in the inter-bank market. But there is more to it than meets the eye. People are buying dollar at say Rs62.75 to place them into bank deposits after converting the same at the rate of 62.15. In other words they are losing 60 paisa on each dollar. But they are anticipating that in the days to come the dollar will rise again. Suppose the dollar shoots up to Rs63.15 in the inter-bank market at the end of this month. In that case these people would sell the dollars they have purchased from the kerb and put in bank deposits at this rate gain 40 paisa per dollar (Rs 63.15-Rs62.75).

Simple arithmetic. But does this reveal an ongoing trend or is it a wild guess? Far from that.

“Look at the foreign exchange figures,” says head of treasury of a foreign bank. He is right. Foreign currency reserves of the banks have risen during the week ending on October 13. The latest State Bank figures released on Thursday show that the reserves held by commercial banks rose from $1.578 billion on October 6 to $1.588 billion on October 13.

“This means people were putting in dollars in foreign currency deposits,” said a central banker. He said it was possible that some people had purchased dollars from kerb and placed them into these deposits. But there is another thing. “Some people might also have redeposited the dollars that they had withdrawn earlier in panic.”

Panic-led as well as purposeful withdrawals accelerated after September 11 terrorist attacks on New York and Washington. Within a month people took out $59 million from their foreign currency deposits for they feared that the government would freeze these deposits.

But prompt issuance of a presidential ordinance guaranteeing the safety of these deposits seemingly changed the sentiments. Besides, a dramatic fall in the dollar value lured many to put greenbacks back into bank deposits to gain windfall when they shoot up.

But a million dollar question is whether the dollar would go up in the weeks to come? “The answer is it would not,” said a central banker who tried to bring home the point that the rupee was not overvalued. But independent economists do not share this optimism.

Many say that the rupee would fall again in the inter-bank market once Pakistan gets into PRGF or EFF or a combination of the two.

Islamabad is trying to secure a medium term PRGF or poverty reduction growth facility from the IMF to remain current on its debt payments. But sources close to the Ministry of Finance say the IMF has offered a combination of PRGF and EFF or extended fund facility. Whereas PRGF is supposed to be a soft-term loan not tagged with harsh conditions the EFF is notorious for its tough “dos and donts.” That is why Pakistan has never been able to get through EFF in the past. Bankers and economists fear if Islamabad is forced to get EFF its harsh conditions would not leave much room for the State Bank to defend the exchange rate effectively.

Meanwhile, the foreign exchange reserves held by the State Bank also rose from $1.750 billion on September 6 to about $1.764 billion on October 13 — showing a buildup of $14 million within a week.

But sources close to the State Bank said the increase in the reserves was not due to any inflow of foreign exchange from the US and other countries that had promised to give aid and grants to Pakistan. Immediately after Pakistan declared its support for the US-led “war against terrorism” the US and Japan as well as some members of the European Union annouced to give a total of about $100 million to Islamabad. The US alone announced a $50 million. But the sources say the central bank has not got even a single dollar so far out of these commitments.

Press reports on Thursday quoted President George W. Bush as having directed release of $50 million more in aid to Pakistan.

But a source close to SBP said the amount had not come into the SBP accounts till Thursday evening.