Sustained growth in forex inflows

Article written by Mohiuddin Aazim

Foreign exchange inflows continue to grow impressively. In April export earnings expanded 40 per cent year-on-year to around $2.38 billion and home remittances swelled 36 per cent to cross a billion dollars mark for the second consecutive month.

This gush of forex flows continues to keep the exchange rates stable and is facilitating dollars buying by the central bank for building foreign exchange reserves.

During the week that ended on May 13 the State Bank of Pakistan bought $250-$275 million from some local and foreign banks, according to bankers’ estimates. The central bank lifted dollars from the market in two-week to two and a half-month forward deals which forced the rupee to shed 40 paisa against the US currency.

Despite the dollar rise due to SBP’s repeated interventions in last several weeks, the rupee is still stronger compared to what it was at the beginning of this fiscal year. In ten and a half months of the year (up to May 13) the local currency has gained more than 0.4 per cent value against the greenback—thanks to sustained growth in dollar inflows amidst a declining growth in import bills. Bankers say that forward sales of export proceeds by exporters in recent past have also boosted supply of foreign exchange. “Importers are cold to forward dollar buying anticipating that the US currency would either remain stable or rise slightly despite SBP’s interventions,” according to chief forex dealer at a foreign bank.

Bankers say foreign exchange companies are selling to banks huge amounts of dollars out of the home remittances channelled through them. Executives of these companies claim they are also supplying in interbank market millions of dollars that they bring in from Dubai after selling there the non-dollar currencies they buy from local people. “People are selling for profit taking euros and pound sterling that they had bought when global recession had made such currencies cheaper. Most of those who are offloading foreign currencies are crazy about gold,” head of a forex company informed Dawn.

During the week that ended on May 13 lots of activities were seen in forex companies. After their May 6 meeting with President Zardari, Exchange Companies Association of Pakistan started brainstorming sessions to attract larger amounts of remittances. But on May 12 the State Bank of Pakistan suspended their branch network expansion projects. This stunned exchange companies. “It is quite confusing,” remarked an official of ECAP.

“President Zardari had told us in the presence of SBP Governor Dr. Shahid Kardar to get more home remittances and had instructed top officials of ministry of finance who were present there, to sort out our issues. But within a week after the meeting, the SBP has rather tried to restrict our activities.” It was against this backdrop that a delegation of ECAP met officials of Exchange Policy Department of SBP on May 13 and tried to convince them to reverse their order suspending branch expansion of exchange companies. Till the filing of this report, the central bank had not heeded to their demand.

Interest rates remained almost stable during the week to May 13 after showing some decline in the previous week. Benchmark six-month KIBOR shed three basis points to settle at 13.56 per cent.

The government raised Rs45.8 billion from the interbank market through sale of three-year Ijara Sukuk or Islamic bonds in its effort to minimise reliance on short-term treasury bills for borrowing from banks. Lately, the government has been borrowing sizable amounts through long-term Pakistan Investment Bonds and Ijara Sukuk.

And it has also been selling more T-bills to corporate and high net worth individuals. “All of this plus non-bank borrowing through National Saving Schemes is going to help the government keep its borrowing from commercial banks within desired limits. Which in turn will give the government leverage to keep short-term interest rates from rising to the disadvantage of industrial growth,” said treasurer of a large local bank.

During January-March, the government mobilised Rs87 billion through NSS—substantially higher than about Rs55 billion in the year-ago period, the most recent data show. SBP monetary statistics released separately reveal that in ten months of this fiscal year, federal government’s most inflationary borrowings from the central bank totalled Rs303 billion whereas its borrowings from commercial banks stood around Rs271 billion. Both numbers show substantial increase over the levels seen in the same period of the last fiscal year—thanks largely to growing expenses on the war-on-terror and debt servicing.

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