The SBP lifted the ban on forward cover facility after three years for importers facing difficulties to hedge their future needs of dollars. — File Photo

KARACHI: The currency market reacted sharply on the first day after the restoration of forward cover facility and panic prevailed in the market over the sudden change. The currency dealers said demand for greenback escalated the spot price, while premium on forward rate went much higher than the market expectations.

Under the forward cover facility importers are allowed to book dollars for their future payment, while the sellers charge higher rate as a premium for hedging.

The ban on forward booking was imposed to curb the speculative forces causing a serious dent to the exchange rate stability.

In the mid of 2008 when the ban was imposed, the country's foreign exchange reserves were in poor shape, while the current account deficit was so high that the country had to approach IMF for emergency loan to meet the deficit and avoid the near default situation.

On Tuesday evening, the SBP restored the forward cover facility, which the market, especially importers appreciated the move expecting relief on their cost of payment for dollars.

“The market just after the lifting of ban witnessed sharp increase in the dollar prices and in the ready market (spot price) dollar shot up to Rs85.70 from Rs85.30,” said Atif Ahmed, a currency dealer in the inter-bank market.

The dollar demand in ready market started falling and at the end of the day it reached Rs85.30, which was the price when the market was closed on Tuesday.

However, the tenure rates were, too, high for the market punters as they said importers booked millions of dollars for future market.

The State Bank has already warned that banks would ensure that the facility was being availed for genuine import transactions and that the “importers do not hedge more than the underlying exposure.”

Market experts said the temptation for forward booking is a temporary trend since it has been restored after three years. The real situation, they said, is quite different from 2008 when the ban was imposed on forward booking.

“The ban was imposed on forward cover to avert exploitation of the weak foreign exchange position of the country which has now changed,” said a senior banker.

For three months the forward cover premium rose to Rs2.30 per dollar, which the currency dealers said was, too, high.

Before this ban the importers had to pay at the spot price but they had arrangements with banks to pay after three or six months at spot price and a premium was set at Rs1.95 per dollar.

The dealers said the strong foreign exchange reserves and negligible current account deficit would reduce the forward cover premium in next few days. Premium goes high when the country faces large external account deficit.