ISLAMABAD, July 3: The State Bank has decided to place $2.8 billion out of the foreign exchange reserves of $12 billion at the disposal of 8 foreign banks for investment in fixed income securities.

While disclosing at a press conference held at the Securities and Exchange Commission here Saturday, the SBP Governor, Dr. Ishrat Hussain said an agreement had already been concluded with the Hong Kong Commercial Bank which would distribute $1.6 billion among four banks.

As regards the remaining amount, he said, an agreement with four other banks was still in the process. He refused to identify them, contending that the lawyers had advised against this.

The remaining reserves had been kept in the US at the rate of interest prevailing in that country. The SBP chief did not, however, divulge any more details about the bank(s) and the rate of interest.

Relating the manner in which these reserves were built up, he recalled that following 1998 explosion of nuclear device, Pakistan had been subjected to sanctions.

In that situation, the remittances through official channels dwindled, because of the big difference between the inter-bank and kerb rate. The foreign exchange reserves were reduced to $1 billion - enough to meet only one week's imports.

The government approached some of the "friendly" countries, whom he did not name, for help but they refused, while the international banks showed their willingness but at rates of interest that were proximate to 15 per cent above Libor.

The State Bank, therefore, purchased $5 billion from the kerb market. Had the same amount of dollars been purchased at the inter bank rate, we would have paid Rs18 billion less. But "extraordinary circumstances demand extraordinary measures", Dr. Hussain asserted.

After 9/11, he continued, remittances started flowing through official channels and as the supply surpassed the requirement, $7 billion were purchased at inter-bank rate.

He pointed out that during 1999-2003, Pakistan paid $17 billion on account of debt servicing.

As a result of remittances and policies adopted by the SBP, the country had been saved from incurring huge debt. The SBP governor cited the example of how the textile industry was provided with $3 billion for purchasing new machinery.

Answering a question about the foreign exchange companies, the the SBP governor said only 20 money changers now remained outside the scheme. In order to accommodate the small firms which exchange only currencies, they were allowed to merge into B category companies requiring a capital of Rs20 million.

In reply to another question, he said the destruction of old currency notes was conducted under fool-proof arrangements. The possibility that some of these were not really destroyed was out of the question, he said.

The SBP governor also explained the position regarding the 85 employees in Islamabad who had been issued notices to vacate the bank's accommodation. The central bank, he said, had decided to sell off all the housing created by it to provide housing to employees and to monetise housing.

This meant that they are paid house rent allowance in lieu of housing. Besides, employees had been provided with house building loans.

Such loans had been received also by the 85 employees who were now refusing to vacate official residences, he asserted.

Answering a question, the SBP governor said the private sector had taken undue advantage of the government's policy of letting them purchase wheat from farmers with bank loans advanced at low rates of interest.

As the government and PASSCO had been unable to purchase wheat at the official support price, there were shortages last year because of hoarding by the private sector.

This year, he said, the government had decided to build a reserve stock of one million tons. In the event of any shortage during the period September-April, the government would release its own stocks.

As such, the directive to Trading Corporation of Pakistan to open tenders for import of wheat had been one of the first decisions of the Prime Minister after taking oath, he stated.

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