KARACHI, Nov 24: Combined foreign currency deposits of the all the banks operating in Pakistan rose to $2.94 billion at end-October from $2.671 billion at end-June , showing a huge increase of $269 million within first four months of this fiscal year.

More importantly, almost the entire increase was recorded in resident foreign currency deposits, suggesting that the trend of dollarization of bank deposits is resurfacing after a long time.

Data released by the State Bank show that resident foreign currency deposits, or those held by people living in Pakistan, shot up to $2.605 billion at end-October from $2.340 billion at end-June, reflecting an increase of $265 million within four months.

Senior bankers say what led to a strong build-up in FCY deposits during the first four months of this fiscal year was a huge 5.5 per cent fall in the rupee value against the US dollar.

Individuals and companies tend to put more in FCY deposits whenever the rupee falls at a pace that makes them believe that converting rupees into dollar or other foreign currencies would earn them handsome margins.

That the FCY deposits, particularly those held by people living in Pakistan, swelled in the wake of the rupee depreciation is evident from the fact that these deposits grew faster in July and October.

In July, the market took the view that the rupee that had remained stable throughout fiscal year July-June 2003-04, would come under pressure for a host of reasons during this fiscal year.

Hence importers went for increased dollar buying and as a result the rupee lost 0.5 per cent value against the US unit and FCY resident foreign currency deposits grew by $100 million.

The facts that had encouraged the market to hold the view that the rupee would weaken included a clear statement made by the government in the budget and the trade policy that the exchange rates would be kept competitive and the indication given in the State Bank's monetary policy statement for July-December 2004 that the exchange rate might remain under pressure.

Besides, international oil prices had started rising since May thus increasing oil import bills and consequently widening the trade deficit. This, coupled with the announcement made in the budget that the government would pre-pay $1 billion external debt during this fiscal year after having pre-paid $1.17 billion during the last fiscal year, reinforced the market view about a possible fall in the rupee value.

Finally, a rupee-dollar swap contracted by Pak-Arab Refinery with some banks to pre-pay $350 million external debt, by borrowing foreign exchange from the banks with the promise to return it in four months to November 2004 also fuelled a pro-dollar sentiment.

This sentiment did prevail in August and September as well but the resident foreign currency deposits rose only modestly during these two months, from $2.44 billion at the end of July to $2.504 billion at the end of September 2004.

In October, however, when the exchange rates remained volatile and the rupee lost 3.6 per cent value against the dollar, resident FCY deposits once again grew by more than a $100 million to $2.605 billion.

Since November 1, the SBP has started selling dollars to banks for oil imports to keep the rupee stable and this measure has helped the local currency recover more than 2.5 per cent of its lost value against the dollar since then.

So, the resident FCY deposits may not grow too fast during this month but that depends on how the market perceives the current temporary halt in the rupee slide against the US currency.

SBP data show that whereas the foreign currency deposits grew by $265 million in four months to October 2004 to $2.605 billion, the non-resident FCY deposits increased by only $4 million to $335 million during this period.

Senior bankers say that this negligible increase in non-resident FCY deposits is reflective of the fact that the interest on FCY deposits in Pakistan is not enough to generate deposits from abroad.

They say that banks are currently offering up to 1 per cent return on FCY deposits which, though unattractive for those who spend in foreign currencies, provides a higher net return for local savers.

A one per cent return on dollar deposits in Pakistan translates into a much higher real return because of the rupee depreciation, the exact real return depending upon the exact depreciation during the tenure of the deposit. Say, if the rupee weakens by 5 per cent during this fiscal year, the net return on dollar deposits would be 6 per cent.

This would be a much higher return than what people are getting on the rupee deposits. The weighted average return on fresh rupee deposits was only about 1.7 per cent in Sept 2004.