MEASURES TO CHECK DOWN SLIDE IN RUPEE VALUE

AMANULLAH BASHAR
July 14 - 20, 2008

The central bank reacting over the down slide of Pak Rupee that depreciated by 8 percent against US dollar since July 1st, 2008 has introduced prompt changes in foreign exchange regulations.

In accordance with the corrective measures, the State Bank of Pakistan has temporarily suspended forward booking on all types of imports. However, commitment already made will be honored in accordance with the terms of related contracts.

Though these measures would help rupee to recover in the short-run, yet steady inflows are imperative to top up reserves to reduce the vulnerability of the external account.

The recent increases in oil, gas and potentially electricity prices look unkind especially at a time when the people are experiencing worst kind of price hike storm, yet the pass-through will help to ease domestic demand and import growth which will resultantly reduce the trade gap.

SLIDE IN RUPEE VALUE

The central bank, however, on its part is continuingly supporting the rupee to ensure exchange rate stability. As a step in this direction, SBP had tightened monetary policy on 22 May 2008 and this was packaged with the imposition of 35% L/C margin on non oil and nonfood imports. These measures helped infuse a degree of exchange rate stability. In the last few weeks of FY08 exchange rate stabilized to an average of Rs.67.50.

Industry however appealed for withdrawal of the L/C margins to allow for import of raw material and intermediary goods for a number of industries. SBP had requested the Industry and Commerce Chambers that the withdrawal of L/Cs was being accommodated on the basis of understanding that industry would import the most vital and essential imports for their industry and will refrain from forward booking of imports. However, in the last few days the level of forward booking for imports has been high while the export proceeds have been delayed. The posture of market participants is causing complications in the smooth functioning of foreign exchange market. In general, the import demand and other requirements have resulted in significant outflow of foreign exchange from the market, while inflows & supply of foreign exchange remained low.

SBP has intervened in the foreign exchange market to reduce excess volatility, prevent the emergence of destabilizing speculative activities and develop an orderly foreign exchange market.

Demand for the dollar has increased mainly due to the tremendous increase in imports. January-May 2008 saw imports increase by 51% over the corresponding period last year. On the supply side of foreign exchange market, Pakistan received fewer inflows than expected. Between January and May 2008, exports rose by only 22% while foreign direct investment and portfolio investment also fell compared to the same period in 2007.

In May 08, speculative activities came to a head, leading to a quick decline in the value of the rupee. The SBP took a number of interim monetary policy measures in response, including the imposition of higher interest rates, stricter LC margins, increased reserve requirements, and enhanced regulation of foreign exchange companies, which stabilized the exchange rate to an extent, with the rupee witnessing some appreciation.

However, on account of continued political uncertainty, shortfall in the foreign exchange receipts in the last quarter of FY08 and the exemption of several items from L/C cash margin requirement pressure on the exchange rate has re-emerged in the first week of July.

In the first eight days of the current fiscal year Pak Rupee has depreciated by 6.6%. Consequently, in order to arrest this recent fall in the value of the rupee, which is largely a reflection of market sentiments, SBP has taken the following measures with immediate impact:

Forward booking against all types of imports have been suspended temporarily; advance payments against import Letter of credit has been reduced from 50% to 25%; all foreign exchange for oil payments will now be made available from State Bank of Pakistan; foreign exchange dealing time for customer and inter-bank transactions has been reduced from 4.30 pm to 2.00 pm; and in order to further strengthen monitoring mechanism of transactions made through exchange Companies it has been decided that henceforth exchange Companies will be required to take prior approval of State Bank for all transactions of US $ 50,000 or above on account of outward remittances or sale of foreign currencies to the customers. However, this requirement will not be applicable on sale of foreign currency to banks/exchange companies.

AMENDMENTS

FORWARD COVER FACILITY

In this respect, it has been decided to temporarily suspend forward booking against all types of imports. Authorized dealers are, therefore, advised not to sell customers foreign exchange on forward basis against imports. Advance

PAYMENT AGAINST IMPORTS

Earlier, the importers were allowed to effect advance payment to the extent of 50% of the FOB or CFR value of the goods to be imported subject to observance of terms and conditions mentioned therein. It has now been decided that the said facility will be available only to the extent of 25% of the FOB or CFR value of the goods to be imported. Other instructions on the subject will remain unchanged.

IMPORT OF POL PRODUCTS

It has now been decided that State Bank will provide foreign exchange to the Authorized dealer for the import of all categories of furnace oil and also against the Form 'M' approval. State Bank of Pakistan will also continue to provide foreign exchange to banks for the import of all other POL products.