KARACHI, Oct 28: A huge fall of three per cent in the rupee value so far during this month has made foreign currency loans extremely unattractive for the importers.
"Foreign currency loans have lost their charm," says Sardar Muhammad Ashraf Khan, an ex-chairman of All Pakistan Polypropylene Woven Sacks Manufacturers Association.
"A huge fall in the rupee value has increased the effective cost of foreign currency loans," he said. Commercial importers based at Jodia Bazar make a similar statement.
Senior bankers also say importers have almost stopped borrowing in foreign currency because a weaker rupee has raised the actual cost of such borrowing. "Not many foreign currency loans are being rolled over...and fresh foreign currency borrowing by importers has almost come to a halt," said treasurer of a large local bank.
Importers had made huge borrowing in foreign currency during the last fiscal year when the rupee had lost only 0.5 per cent of its value. But as the rupee began to lose its strength with the start of the new fiscal year in July, the amount of FCY import loans started declining.
Data released by the State Bank show that FCY import loans fell to $118 million at end-September from $305 million at end-June 2004, showing a decline of $187 million or 158 per cent within three months.
In the last fiscal year, when the rupee had remained stable, importers continued rolling over foreign currency loans and at times also sought fresh loans. That explains why these loans ranged between $200-300 million throughout the year.
Banks offer foreign currency import loans by adding some premium over LIBOR or London Interbank Offered Rate. When the rupee depreciates, the cost of these loans go up as the borrowers also have to arrange for higher amount of rupee equivalent of the loans obtained in foreign currency.
FUTURE OUTLOOK: Whether importers would resort to foreign currency borrowing depends on how fast the rupee depreciates and how the interest rates move up. If the rupee stabilizes at its current level and if the interest rates continue to rise, importers may find it feasible to restart borrowing in foreign currency. But if the rupee continues falling amidst rising interest rates, they would be in trouble.
"Then we will have to choose which way to go, keeping in view the difference between the rupee loans and foreign currency loans," says a leading importer of chemicals and dyes.
The cost of borrowing in rupees has also increased since the start of this fiscal year in July in response to a gradual tightening of monetary policy by the State Bank. Weighted average lending rate of all the banks combined rose to 5.08 per cent on fresh lending in August from 4.63 per cent in July 2004. Fresh credit disbursement in September is likely to be still higher.
Besides, Karachi Interbank Offered Rate or KIBOR has also been on the rise since July making all KIBOR-based lending more expensive. On the other hand, rupee has lost five per cent value against the dollar since July and looks set to depreciate further because of higher oil prices. To add insult to injury, LIBOR that serves as benchmark for pricing the foreign currency loans has also risen by more than a quarter percentage point since July.