BENCHMARK KIBOR of all tenures witnessed an increase of 22 to 35 basis points during the week ending December 3 after a 50bps rise in the central bank's policy rate.

The State Bank of Pakistan raised its discount rate from 13.5 to 14 per cent from November 30 to rein in inflation. During July-October this year, the average CPI inflation was up 14.2 per cent over the same period of last year.

The rate rise—the third in a row so far this fiscal year—came at a time when banks reported a pick up in demand for private sector credit and amidst signals that the government would be borrowing more from banks rather than from the SBP. “It is in this context that the pass-through of policy rate hike is immediate and strong and we hope to sustain it,” said treasurer of a large local bank.

The federal government's borrowing from the SBP between July and November 19 reached Rs282 billion which, in part, has been responsible for accelerating inflation. Its borrowing from commercial banks, during this period, totalled Rs76 billion.

Bankers say, more recent data should show in coming weeks an increasing trend in government borrowing from commercial banks. They base their anticipation on huge auctioning of treasury bills in the last two weeks.

Credit off-take from the private sector that remained negative in the first quarter has now picked up. And the net borrowing of the private sector between July 1 and November 19 has crossed Rs34 billion. In the same period of the last fiscal year, the private sector had borrowed only Rs13 billion. “So we can say there is a stronger demand for private sector credit this year which is why we hope that current interest rates are sustainable,” said treasurer of another local bank.

Industrialists, however, say that frequent policy rate hikes and consequent rise in their cost of bank credit may hurt industrial growth. Large-scale manufacturing has declined 1.5 per cent in the first quarter of this fiscal year due to disruptions in raw material supplies during the recent floods and frequent gas and electricity outages.

Since the beginning of this fiscal year, the central bank has increased its policy rate by 150 basis points. In the meantime, benchmark six-month and one-year KIBOR have also gone up 120bps and 136bps to 13.57 and 14.08 per cent respectively.

“As banks add a few percentage points over KIBOR while lending to businesses, effective lending rates on six-month to one-year loans now range between 14-16 per cent for even first-class borrowers,” said chief financial officer of a leading pharmaceutical company. “There is sense in the argument that further rise in interest rates will depress industrial activity.”

During the week ending December 3 the rupee lost another 14 paisa against the dollar as bankers reported a slowdown in realisation of overdue export proceeds and increase in dollar demand ahead of end-quarter external debts servicing.

The rupee had lost 37 paisa in last two weeks on higher demand for dollars on payment of overdue oil import bills. At 85.81 a dollar as on December 3, the local currency, however, shows a nominal slipping of only 30 paisa vis-à-vis the dollar since the beginning of this fiscal year.

As the rupee slipped to 85.81 a dollar in the inter-bank market, the spread between it and open foreign exchange markets almost vanished. Executives of exchange companies said this would discourage transfer of foreign exchange into the country from abroad through hundi/hawala.

Bankers said strong foreign buying in Pakistani stocks seen during the week ending December 3 might have a positive impact on exchange rates during this week. The foreign buying euphoria was so strong that Karachi stock reported inflow of $10 million during a single session on December 3.

Meanwhile, foreign exchange reserves fell to $16.74 billion during the week ending November 27 from $16.85 billion a week earlier.

It is feared that Pakistan may not be able to draw $3.6 billion last two tranches of the $11.3 billion IMF standby loan by the end of this month because of the delay in implementation of Reformed General Sales Tax—a loan prerequisite. “If that happens, you may see further fall in foreign exchange reserves in the weeks to come,” said a source in the SBP. However, Pakistan is trying to seek extension in the IMF standby programme and secure release of at least one tranche of $1.8 billion towards the month-end. The programme is structured to expire in December 2010 but can be extended up to November 2011.