KARACHI, June 21: The Board of Directors of the State Bank has taken note of the recent debate in the parliament and media on SBP's foreign exchange purchases and its impact on SBP's profit and loss account.

The board that met on Monday in Quetta analyzed in details the issues under debate and considered it appropriate to clarify the position, says a press release issued by the central bank. The clarification denies the charge that the SBP has built up foreign exchange reserves through purchases from the open currency market.

It says that the factors contributing to the reserves accumulation between fiscal year 1998-1999 to 2003-04 include: Significant reduction in debt servicing payments due to implementation of debt reduction strategy; increased inflow of workers remittances or money sent back home by overseas Pakistanis; reduced imbalances in the trade account until fiscal year 2003-04; higher disbursements of foreign economic assistance; and foreign direct investment inflows showing some modest rise.

The clarification says: "After the nuclear test in 1998 and consequential sanctions on Pakistan, official inflows declined considerably and these inflows were inadequate to meet the outflow obligations.

"To avoid default on the country's external payments, the State Bank of Pakistan intentionally adopted a policy, with the approval of the federal government to make all payments on time and build up foreign exchange reserves for future debt servicing liabilities by buying foreign exchange from the kerb market.

"The State Bank of Pakistan purchased $5.654 billion from the kerb market from FY99 to FY02, mainly to discharge its obligations. As the flows in the inter-bank market improved, the SBP stopped purchases from the open market after FY02.

"All purchases from the kerb market were through the Foreign Exchange Association of Pakistan, the representative body of authorized money changers, as well as big money changers through banking channels."

In addition to this "SBP also purchased $10.838 billion from the inter-bank market in the period between FY99 and March 2004, at prevailing inter-bank rate without paying any premium, and sold $3.982 billion during the same period." Thus the net purchases from the inter-bank market during this period amounted to $6.856 billion.