KARACHI, July 22: The rupee shed five paisa against the dollar on Thursday as importers jumped in to purchase foreign exchange and exporters delayed selling of export proceeds.

Senior bankers said the rupee closed at 58.31 a US dollar in the inter-bank market against the previous close of 58.26 as importers-led forward booking of dollars shot up and realisation of export proceeds slowed. They said the premium on six-month forward buying rose to 16 paisa per dollar from 6-10 paisa on Wednesday.

What prompted the importers to buy forward dollars and what tempted the exporters to delay selling of export proceeds was that the State Bank in its monetary policy statement released on Wednesday clearly indicated that the rupee would weaken in July- December 2004.

The monetary policy also indicated that interest rates would rise gradually-and SBP strengthened this indication the same day by allowing a 45 basis points rise in the six-month treasury bills yield.

Whereas the rupee threw off some weight in response to the SBP policy statement Karachi inter-bank offered rate or Kibor also went up as bankers took the clue of rising interest rate from the same statement. Six-month Kibor rose to 2.90 per cent on Thursday from 2.80 on Wednesday.

A weaker rupee should help the exporters achieve the export target of $13.7 billion set for fiscal year July-June 2004-05. But an increase in the interest rate would add to their cost of production and may wipe off the benefit of a weaker local currency.

So on balance exporters should be prepared to work harder to achieve $13.7 billion export target during this fiscal year up 11.6 per cent from the actual exports of $12.27 billion in the last year. "We know that the benefit of a weaker rupee would be offset by rising interest rates," says a leading textile exporter Mr Iqbal Ibrahim. But that is where the skills of the exporters will be tested. To achieve the export target in the backdrop of rising interest rates they will have to be more cost-efficient in production and be pro-active in marketing taking the benefit of a weaker rupee. "That is what we must be prepared to do," says Mr Ibrahim.

Why the SBP has cautioned the market that the rupee may weaken is that Pakistan is anticipating a large trade deficit of $3 billion during this fiscal year only slightly lower than that of $3.2 billion in the outgoing year. But despite that the country is ready to retire more of its external debts ahead of time and plans to go ahead with faster lifting of curbs on forex outflows.

Finance Minister Shaukat Aziz said in his budget speech last month that the country would pre-pay $400 million more of expensive external debts by December 2004. In the last fiscal year Pakistan retired ahead of schedule $1.17 billion Asian Development Bank loans.

In addition to pre-payment of external debt by the government the corporate sector is also retiring its foreign loans before time. Pak-Arab Refinery Co or Parco pre-paid a Japanese loan of more than $350 million late last fiscal year but it did so by borrowing dollars from the banks and is yet to repay $300 million to them by October 2004. That is sure to keep the rupee under pressure in next three months and the pressure may intensify if some other corporates also go for pre-payment of external loans.

So far this month the rupee has lost 18 paisa or more than 0.3 per cent of its value against the US dollar coming down to 58.30 on Thursday from 58.12 at end-June 2004.

The central bank seems set to let the rupee fall gradually not only because it is anticipating worsening of external account but also because it does not have enough room now to intervene and prop up the local currency. On the other hand it is making moves to allow a gradual hike in interest rates to contain soaring inflation. As a result of the increase in six-month T-bills rate in May the maximum mark up on concessional export financing rose from 3 to 3.5 per cent in June and the latest increase of 45bps in the same may increase it to 4 per cent in August. This gradual increase in export financing rates may have a dampening effect on the performance of exporters in 2004-05.

Even weighted average lending rate of all the banks combined rose to 5.42 per cent at end-May 2004 from 5.07 per cent in April due to gradual unannounced tightening of monetary policy started in mid-February 2004. Now that the SBP has indicated in its monetary policy statement that the interest rates may rise gradually, meeting an export target of $13.7 billion does not seem to be an easy task.

But the problem here is that the central bank could not have avoided tightening of monetary policy and freeing up of exchange rate even if it wanted to do so. The reason: the IMF prescription.

Says the latest IMF report on Pakistan released on Thursday: "Inflation remains modest given the pace of economic growth. Nevertheless (IMF) staff urges the SBP to further tighten monetary policy promptly and more substantially, especially if inflationary pressures continue to build. The staff supports the current exchange rate policy followed by the SBP and its intention to resist sustained pressures on the rate in either direction."