May 12 - 18, 2008

The Central Bank has taken a serious note of the recent speculative trends in the kerb market to ensure rationale in dollar-rupee parity, however, the central banks has made it clear that it has no intention to intervene in the market which is real force to determine the value.

The Rupee, however, continued losing ground at the outset of the open market which touched the peak at Rs70 a dollar on Saturday last. The ready market and telegraphic transfer traded at as low as Rs70 per dollar reminding those horrible days of 1999, when rupee was touching this low-ebb just before the toppling of Nawaz government. But the impact of the weakening of rupee is much severe especially in the face of horrible rise in international oil prices touching the level of over $126 a barrel last week. The high price on one hand the declining rupee against dollar on the other hand burning the candle at both ends. The central bank in Pakistan trying to contain inflation which again has touched unprecedented high of 25.38 percent measured through SPI due to increase in prices of 24 essential commodities. Unless the effective measures are taken at the earliest the storm of inflation will continue to erode the economy as well as adding to poverty level in the country.

The Governor State Bank of Pakistan Dr. Shamshad Akhtar has however asserted in an interview that the central bank would not devalue or revalue the exchange rate and the market alone will determine is real value. She however expressed concerns over what she called the excessive volatility and weakened exchange rates. The Governor commented that the recent behavior of the exchange market was not in line with the parameters set by the central bank.

For the sake of some corrective steps, the central bank has stopped indefinitely all exchange companies from exporting British Pound, Euro and Dirham, meanwhile, the dollar in open market still got costlier.

The cash export of currencies by the exchange companies has been stopped forthwith. It may be mentioned that exchange companies used to carry out in cash different currencies with the permission of the Central Bank and as against that dollars were imported. Forex market sources said that the government had taken this step in 2001 also for salvaging the sinking rupee, which had triggered black marketing of dollar.

It may be mentioned that among other currencies, British Pound exchanged at Rs131.90, Euro at Rs103.80, Japanese Yen at Rs0.638, Emirates Dirham at Rs18.20, Saudi Riyal at Rs17.80, while Canadian dollar sold at Rs65.95

Dr. Shamshad Akhtar, the governor State Bank of Pakistan has directed the exchange companies to keep dollar-rupee parity differential between the Inter-Bank and Kerb markets at rational levels, restrain from speculation and to focus on bringing in home remittances into the country.

"This differential should not be beyond normal trends seen in the past," she told exchange companies representatives. The Exchange Companies representatives have however gave a firm commitment to the Governor that they will ensure that dollar-rupee parity differential between the Inter-Bank and Kerb market comes down to normal levels within a week. They also assured their cooperation to work with SBP. Dr Akhtar said that instead of curbing speculative trends, some exchange companies are playing a role in the speculation that is totally unacceptable. "You should not be led by is the time to serve the country not to mint money through irregularities," she added.

The whole idea behind setting up exchange companies was that these companies would play a pivotal role in attracting home remittances and in curbing activities of illegal operators. But, she added, it has been noted that some exchange companies are themselves indulging in illegal activities. "Any evidence obtained against any exchange company would be sufficient to suspend or cancel the license of that company," she warned.

SBP Governor further stressed upon exchange companies to focus on bringing in more and more home remittances and added that "this should be the primary target of the exchange companies." Dr Akhtar said that in 2006 the State Bank had made it clear that no remittance on account of trade transactions would be undertaken by exchange companies. However, it has been observed that a number of remittances are being reportedly made for trade settlement directly or indirectly. "SBP has taken a very serious view of it and we are going to take action against companies involved in these transactions and also in other irregularities," she added.

Dr Shamshad Akhtar also announced the blueprint of reforms being introduced in the Exchange Company Sector with a view to (i) define more clearly the objectives and scope of exchange companies, (ii) well capitalize the sector, and (iii) bring better market discipline through enhanced transparency, disclosure and strong monitoring and supervision. However, these measures will be introduced in a manner that promotes long-term business interests in an effective and well-encompassing regulatory environment while seeking to avoid potentially adverse near-term impacts on the service levels of Exchange Companies for general public. This announcement was made by the Governor during a meeting with the Heads of Exchange Companies held at the State Bank of Pakistan, Karachi today.

Dr Akhtar said that SBP has decided to change its approach from "bringing financial discipline and corporate culture" to "ensuring discipline and maximum compliance". In this respect SBP has reviewed the whole regime for exchange companies with the objective of defining better role and responsibility of exchange companies. On the enforcement side, the exchange companies should not expect any leniency. SBP would not spare any company regardless of its market size to establish the regulatory writ.

The State Bank is launching the second-phase reforms for the exchange companies and will issue regulatory guidelines that will set in motion corporate governance reforms for the exchange companies. A notice regarding these reforms was issued to exchange companies in the last meeting chaired by the Governor. "Our intention is to take you (exchange companies) forward and to promote your businesses provided you abide by rules of business," she asserted. She also urged upon the exchange companies to seek mergers & acquisitions so as to consolidate and strengthen the sector and increase its efficiency.


Foreign exchange inflows to the tune of $3.0 billion to $3.5 billion are expected to come in the banking system in the short to medium-term. These flows coupled with joint efforts of SBP Commercial Banks will further stabilize the Pakistani Rupee parity vis--vis U.S. Dollar and calm down foreign exchange markets.

The Government has taken steps to mobilize foreign funds and some of the inflows which are expected to realize soon include $2.1 billion from Multilateral Banks, $500 million from friendly countries, $200 million for earthquake relief, $100million from DFID, $700million from MCB Bank's stake sale, $100 million from Barclays Bank and the rest through private sector GDRs and other regular sources.

During a meeting with heads of commercial banks Dr Shamshad Akhtar, Governor SBP has assured the banking system that there will be "no reversal" of foreign exchange liberalization measures seen in the past years. However, she expressed her concerns over excessive volatility and weakened Exchange Rate and commented that the recent behavior of the exchange market "is totally out of line."

"We aren't in a crisis like situation several measures are in place to remove macro-economic imbalances," she said and added that the Government has expressed its firm resolve to bring down fiscal-deficit, retire central bank borrowings and cut non-developmental expenditures. "There is a strong recognition that macro-economic imbalances have to be resurrected and this is the corner stone of Government's economic policy," she added.

She said that the Government is also taking measures to control inflation and added that the central bank will continue to remain in a monetary tightening phase.

Given these facts, SBP Governor said: "Current rupee volatility is not reflective of the macro-economic fundamentals." She said that she is perplexed over recent Inter-Bank market behavior and urged banks to play a proactive role to kill negative sentiments in the market. She said that the central bank has made timely and effective interventions in the market and added that any future interventions by the central bank will be in accordance with its analysis of the situation. The Central Bank is vigilant of the situation and will take the necessary steps as the situation warrants.

"Had we not intervened effectively, the exchange rate would have been at a different level, but present level doesn't reflect fundamentals" she added.

SBP Governor urged the bankers to educate their clients, including importers and exporters, about true macro-economic fundamentals and play their role to bring stability in the Inter-Bank market, which is not only in the interest of the country but banks as well.

She said that banks have a duty to encourage exporters not to hold back export receipts and mobilize foreign exchange funds in the interest of the country. "Let's think of the country-strong economy is also in the interest of the banking industry."

SBP Governor urged banks to increase their deposit rates and said that banks should also focus on increasing private sector credit disbursements as it will help the country to remain on a high GDP growth trajectory.

Dr Akhtar said that the central bank realizes that some moderate trading is healthy to nurture inter-bank market and ensure price discovery and liquidity; however it has been noticed that some banks are engaged in excessive trading which is detrimental to market discipline. In the current environment it is not appropriate to indulge in excessive trading creating undue volatility in the Exchange Rate. She added that the central bank's advice is that banks" treasuries maintain strong relationships with their customers; this should help mute excessive volatility. "Customer's excessive shopping with different banks for the same transaction often creates a perception of larger outflows, which is not always the case," she added.

The central bank has conducted a few surprise inspections and it is found that some banks were not following regulations in closing-forward import contracts. In some cases contracts have been closed out at off-market prices rather than current market prices, she said and added such practices encourage customers to take frequent speculative positions rather than "true" hedging.

Moreover, she said it is also noticed during surprise inspections that a few large cash transactions were going through the FE-25 accounts i.e. cash deposits followed by TT outflows. There is also considerable delay in exporters selling their proceeds in the market. "Banks are responsible to ensure compliance with all SBP regulations in this regard otherwise they will face penalties. We will also increase our vigilance to ensure that the export proceeds are realized in time," the Governor asserted.

Dr Akhtar said that the central bank is in no mood to impose any severe administrative controls over the Foreign Exchange market and added that it is expected that the market players will behave rationally. "However, if the market fails to discipline itself, the regulator has to fix things," she asserted.


The total liquid foreign reserves held by the country stood at $ 12,255.8 million on 3rd May, 2008. The break-up of the foreign reserves position is as under: -

i) Foreign reserves held by the State Bank of Pakistan:

$ 09,926.2 million.

ii) Net foreign reserves held by banks (other than SBP):

$ 2,329.6 million

iii) Total liquid foreign reserves:

$ 12,255.8 million