KARACHI, July 16: Foreign currency deposits rose by $375 million or more than 16 per cent during the fiscal year 2003-04 as the rupee lost half a percentage point of its value against the US dollar.

According to the data released by the State Bank, fresh foreign currency deposits or the deposits raised by banks after May 1998, rose to $2.671 billion at end-June 2004 from $2.296 billion at end-June 2003.

The data shows that the FCY deposits maintained by the people living in Pakistan grew by $387 million or about 20 per cent to $2.34 billion from $1.953 billion during the period under review.

Though the increase in the volume of FCY deposits is not alarming, the rate of growth is pretty high. Bankers say that a fast-paced increase in the foreign currency deposits in the last fiscal year indicates that businesses and individuals had anticipated a fall in the rupee value against the dollar.

A low return on rupee-based deposits provided them further impetus to maintain the FCY deposits. Weighted average rate of return on bank deposits fell to 1.21 per cent at end-April 2004 from 1.90 per cent at end-June 2003, showing a decline of 69 basis points in 10 months.

A 0.6 per cent depreciation in the rupee value between July and April 2003-04 further eroded the real value of even this low rate of return. This tempted businesses and individuals to convert some rupee- based deposits in the FCY deposits or open fresh FCY accounts.

Figures for weighted average return on foreign currency deposits are not available but bankers say that an increase in London inter-bank offered rate or LIBOR during the last fiscal year helped them offer a better return to the FCY depositors.

Bankers say that an increase in LIBOR led them to invest more of their FCY holdings with the banks abroad. The SBP data shows that placement of FCY deposits abroad increased by $132 million or more than 57 per cent to $362 million at end-June 2004 from $230 million at end-June 2003.

This $362 million placed abroad was part of the $398 million that banks placed for earning returns instead of using them in loaning. The remaining $36 million was employed with the banks operating in Pakistan.

Whereas the placement of FCY deposits in local and foreign markets increased during the last fiscal year, use of these deposits for import and export financing decreased.

The SBP data shows that the funds locked in export financing fell to $540 million at end-June 2004 from $727 million at end-June 2003. Similarly, the use of foreign currency deposits for import financing by banks declined to $305 million from approximately $329 million.

But bankers say that with a half a percentage point increase in export refinance rate from June 2004, coupled with similar hikes during this fiscal year, may result in higher disbursement of foreign currency loans to exporters.

For June-July 2004, the maximum permissible mark-up on export financing by banks is 3.5 per cent, but this rate seems set to rise with an anticipated increase in treasury bills rates. Against this, banks are providing export loans in foreign currency at 3-3.5 per cent to a large number of exporters. The best among them can borrow even at lower rates.

This, coupled with chances of further depreciation in rupee value during this fiscal year is likely to increase foreign currency lending to the exporters. The rupee is weakening as trade deficit is soaring to new heights and the country keeps on liberalizing its foreign exchange market, allowing higher outflows of foreign exchange from the banking system.