KARACHI, Dec 1: Foreign exchange companies sold around $288 million to banks in fiscal year July-June 2003-04, according to data released by the State Bank of Pakistan.

The data annexed to a report on exchange companies show that these companies, 22 in number, purchased $6.59 billion and sold $5.67 billion in the outgoing fiscal year. The data further show that whereas foreign exchange companies sold $288 million to banks through their nostro accounts, they also sold about $95.6 million in cash.

Principal foreign exchange companies or the exchange companies in 'A' category started operations in February 2003 whereas mini exchange companies or exchange companies in B category became operational in July 2003.

Though the central bank has directed exchange companies to transact the bulk of their business through nostro accounts or their foreign currency accounts maintained overseas, the companies transacted more business based on cash and less based on nostro accounts in the last fiscal year.

SBP data show that out of the total foreign exchange buying of $6.59 billion in FY04, the exchange companies bought $2.379 billion through nostro-based transactions and $4.212 billion through cash-based transactions.

Similarly, out of their total foreign exchange selling of $5.67 billion, these companies sold $2.073 billion through nostro-based transactions and $3.596 billion through cash-based transactions.

From the central bank's point of view this means that the exchange companies are yet to go a long way in implementing the Know Your Customer (KCY) culture. SBP data show that the exchange companies sold $939 million for credit to the foreign currency accounts of those residing in Pakistan.

Put simply it means that individuals or companies having foreign currency accounts in banks purchased $939 million from the exchange companies in the last fiscal year and placed them in their bank accounts.

They might have done that for a variety of reasons, but this effectively means dollarization of bank deposits. People and companies normally buy foreign currencies from exchange companies and place them in their FCY accounts when they receive low returns on rupee deposits. They also do it in anticipation that the rupee may fall against foreign currencies.

That this factor was a driving force behind the dollarization of bank deposits is evident from the fact that the rupee, in fact, depreciated against all major currencies in the last fiscal year. It lost 0.5 per cent value against the US dollar, 9.3 per cent against the euro and 3.2 per cent against the UK pound sterling.

The SBP data show that the exchange companies sold $736 million to their customers for making outward remittances, but the sale was entirely transacted through nostro accounts. Individuals and companies are free to buy foreign exchange from exchange companies and remit it abroad after declaring the purpose.

Executives of exchange companies say that the sale of $736 million by the exchange companies also include the outflows of foreign exchange to finance purchase of real estate abroad, once seen as a major source of constant pressure on the rupee in the open market.