KARACHI, Nov 1: The State Bank, on Monday, tightened rules to check outflows of foreign exchange and help the rupee recover its lost strength. The rupee lost 5.5 per cent value against the US dollar in four months of this fiscal year , falling to 61.36 at end-October from 58.13 at end-June 2004.
The central bank also notified to the banks the decision announced by its Governor Dr Ishrat Husain on Saturday to provide foreign exchange to the banks for financing oil import bills. The tightening of the rules combined with this decision and the SBP's intervention in the foreign exchange market helped the rupee recover 48 paisa or 0.8 per cent value against the dollar.
The SBP stopped the banks from selling forward dollars against contracts, made settlement of foreign currency export loans difficult and imposed some restrictions on advance payment of import bills. The central bank said it made these measures after noticing misuse of some foreign exchange related facilities by "some market participants." But it made it clear that it remains "committed to a liberal foreign exchange regime."
The central bank did not say who misused liberal foreign exchange rules, businessmen or banks or both.
The SBP told the banks that they would now provide forward booking of foreign exchange only against letters of credit. "Under no circumstances may the authorized dealers provide forward bookings against contracts, etc.," it warned.
It advised them that from now onwards all foreign currency exports loans "shall only be settled through realization of export proceeds" or remittances from abroad, towards such loans, maturing on or after November 02, 2004.
It also told them that advance payment of imports would be allowed up to 50 per cent of the estimated C & F value of the total quantity of the goods to be imported.
The central bank said this too would be allowed against irrevocable letters of credit covering import of industrial capital goods; plant, machinery and equipment for manufacturing, excluding spare parts.
Earlier, settlement of FCY export loans and outward remittance of foreign exchange in the name of advance payment of import bills were more liberal and across the board. Besides, banks were allowed to sell forward dollars to importers against buying contracts.
The FE 16 circular of SBP's Exchange Policy Department that conveyed the above decisions to the banks also informed them that during Ramazan, the cut-off time for foreign exchange dealings would be 12:00 noon. "After Ramadan, these timings would be extended up to 2:00 pm Monday through Thursday & 1:00 pm for Friday and Saturday," it said.
Through a separate letter, the department also informed the banks of the SBP decision to pay for oil import and advised them to tell the central bank two days in advance about the payment of oil import bills. It said the SBP would provide foreign exchange to them against rupees "on the previous day's closing weighted average rate."
Text of the SBP's FE 16 circular and its letter to banks on payment of oil import bills follow:
"The State Bank of Pakistan remains committed to a liberal foreign exchange regime, but in recent months there have been instances of misuse of some of the facilities by certain market participants. An analysis of the market conditions has revealed that there are some loopholes in the existing instructions and guidelines, which have to be plugged in. In order to further streamline the procedures, remove certain anomalies and to curb distortions often observed due to speculative activities, it has been decided to take the following measures for immediate implementation: i) Cut-off Timings for FX Dealing by Banks' Treasuries:
The Cut-off time for FX Dealing by all Bank Treasuries with their customers and in the inter-bank market shall henceforth be up to 12 noon during the month of Ramadan. After Ramadan, these timings would be extended up to 2:00 pm Monday through Thursday & 1:00 pm for Friday and Saturday. ii) Settlement of FE-25 Loans for Exports:
In terms of EPD Circular Letter Nos. 5 and 9 dated 23.08.2002 and 12.11.2002 respectively, adjustment of FE-25 Loans against Exports Financing through the Inter-bank Market is allowed by the State Bank on a case to case basis, where realization of export proceeds is not expected either due to cancellation of the underlying contracts before shipment or circumstances leading to cancellation of export contracts after partial performance. Henceforth, all FE-25 Loans against intended exports shall only be settled through realization of export proceeds or remittances from abroad, in respect of all FE-25 loans for exports, maturing on or after November 02, 2004. iii) Advance Payment Against Imports:
With reference to Paras 17(i) & (ii) and 30(i) of Chapter- XIII of FE Manual (8th Edition, 2002) concerning Advance Payment by the Importers through Authorized Dealers against L/Cs, Contracts, Performa invoices, etc., it has been decided that henceforth remittance of Advance Payments shall only be allowed to the extent of 50pc of the estimated C & F value of the total quantity of goods intended to be imported, only against irrevocable letters of credit covering import of industrial capital goods; plant, machinery and equipment for manufacturing excluding spare parts.
Sub-paragraph (i) Para 17 of Chapter XIII of FE Manual (8th Edition 2002), therefore, may be amended accordingly. Furthermore, sub-paragraph (i) Para 30 of Chapter XIII of FE Manual (8th Edition, 2002 may be replaced with the following Para:
"Authorized Dealers may consider applications for advance remittance against imports up to the extent of 50% of the estimated C & F value of the capital goods to be imported only against irrevocable Letters of Credit, covering import of industrial capital goods; plant, machinery and equipment for manufacturing, excluding spare parts. Applications for such advance remittance should be made to Authorized Dealer on Form "I" and should be accompanied by the original contract entered into between the importer and the foreign manufacturer or supplier and a copy of the irrevocable Letter of Credit. The applications should also be supported by an undertaking in the prescribed form (Appendix V-29) duly signed by the importer."
Forward contracts: Authorized dealers may provide forward booking only against letters of credit. Under no circumstances may the authorized dealers provide forward bookings against contracts etc. Relevant chapters / paras of the Foreign Exchange Manual referring to forward cover against contracts etc. therefore stand accordingly suspended till further instructions." Payments against imports of POL products
"In order to provide adequate liquidity to the interbank market against rising prices of POL products in the International Markets, it has been decided that with immediate effect State Bank would make available funds to the market from its resources to make payments in foreign currency in settlement of import of POL products.
All Authorized Dealers must, therefore, ensure that all such payment commitments, from this day onwards and until further notice, are advised to State Bank of Pakistan at least two clear working days ahead of the value date along with details of their nostro account to which credit in foreign currency shall be provided against debit of equivalent rupees to their account maintained with SBP, on the previous day's closing weighted average rate."