KARACHI (November 21 2002) : In the inter-bank market, the wobbly dollar, after hitting 22-month low at Rs 58.35 made a small recovery of 22 paisa on SBP buying.
Remittances continue to spill over through the banking channels, as Pakistanis living across the seas prefer sending their money officially, firstly because sending money through 'hundi' is no more economical, and secondly, they are unwilling take any risk in view of global crackdown on terrorist money.
Asad Rizvi, of Currency Market Associates, when asked for his comment after both of his forecasts of Rs 58.50 to a dollar (Business Recorder, Oct 2001) and cut in discount rate (Business Recorder, August 17) came true, said, “The pace of dollar's fall against the rupee during the last three weeks was pretty fast, but that also indicates that the size of the flow of Dollar the country”.
He said: “The problem is that we are not well-equipped to handle such a huge inflow of foreign money. What I mean is that reserves management is now a very challenging and daunting task, due to various risks involved. But this does not mean that we are not competent enough to handle the situation; it is simply because of very limited options available to us.
“Keeping in view the number of expatriate Pakistanis working abroad, which is over 3.5 million, the flow of remittances through banking channel is more likely to expand with the global tightening of dirty money. There is a sharp risk of dollar's fall by another 2 percent, by no later than the second quarter of 2003. On its fall, the dollar will find next major support level at Rs 57.20.”
CMKA, according to him, does not expect the corporate sector to pick up any time soon, unless there is a change in the attitude, “The effect of interest cut starts taking place in six-month to one-year time. Last discount rate cut was in January, 2002, but our corporate sector could not get the initial boost, as commercial banks failed to respond to the central bank's call of easing lending rates.”
He continued: “It was only the private banks which made corporate lending of over Rs 50 billion during the current fiscal year. Nationalised and foreign banks remained in the red. How could one expect upward push in economy when commercial banks, despite 5 percent cut in the discount rate, which eased from 14 percent to 9 percent, eased its lending rate at snail's pace by a mere 1 percent to 1.5 percent. This week discount was further chopped to 7.5 percent.
“In an international market, when a central bank cuts its rates, the normal practice is that major commercial banks follow it immediately by slashing their prime lending rate. We are approaching a New Year but businessmen could not get the expected cut relief.
If we are unable to adopt a strategy and do not act timely, then one fails to understand the purpose of aggressive rate cut by the SBP. Our argument is that if according to nationalised banks their cost of borrowing of funds is too high and, therefore, they cannot follow the central bank's immediate call to lower its rate, well, then the counter-argument could be that the deposit rates of nationalised banks are also comparatively lower by 1.5 percent to 3 percent as compared to foreign and private commercial banks deposit rates.
This we have been hearing for the last three decades. What has stopped the nationalised banks to lower their rates during last so many years? Why don't they act quickly? Why should the country's economy suffer to pave the way for them?
“CMKA believes that the SBP is partly to be blamed for the low response from the corporate sector. One does not argue about global economic slowdown, but in reality Pakistan is a beneficiary from the changing global scenario. By September, 2001, country's reserves had hit $ 3 billion mark and by now these has reached the all-time record high of $ 8.86 billion due to surge in remittances business, which also means rupee liquidity of Rs 350 million in the system.
Despite availability of rupee against the purchase of dollar, the inter-bank rupee market, on average basis, has been suffering from rupee liquidity crunch. Rupee discounting was a regular feature of resulting cost of fund of the banks rising to somewhere between 7 percent and 7.25 percent. This has also put the market on the defensive.
“It would have been wiser had the inter-bank rupee market was kept liquid soon after January 2002 rate cut, which would have forced the banks to explore the corporate sector rather than helping the commercial banks to purchase government Securities. On average, banks are currently carrying a portfolio of' over 50 percent of their demand and time liability, which further indicates why the corporate sector has suffered.
“CMKA is of view that the consumer is the net loser due to higher lending rates. The government, which is looking for various avenues to provide relief to common man also, fails to succeed in its mission. If the rupee liquidity is pumped in the market the financial institutions would be forced to lower their mark-up rates and the corporate business would surely pick up. There should be a cap on car leasing rates, housing loans, credit card rates and consumer products financing as the rates offered to the customer are still unbelievably high.
“Money market players received another setback when the 'Primary Dealers' were informed that the scheduled 3 years and 5 years PIBs auctions have been temporarily suspended, which means that the fate of 10 years' auction would be known later.
The reason given was that the SBP was revamping the PIBs. Banks were told that they would be informed about the outcome at a later stage. This shattered the confidence of bond market dealers and the development of secondary market has gone down the drain. Banks have specially hired dealers to manage funds and to fulfil their commitments made to the SBP for the growth of the secondary market.
“While the global economy is not going to come out of the brunt too soon, we still see further rate cut by the Fed and by the other major countries in an effort to prop up their economy.
“CMKA believes that our rate cut is too late and therefore too little. The State Bank of Pakistan may consider further cutting its discount rate by another 100 to 150 basis points, following the global pattern. Therefore, the sooner the better it is, but even if they disagrees with our theory of further rate cut, the success could only be achieved by keeping the rupee market liquid, or else the exercise of lowering the rates will remain futile.”
