KARACHI (November 18 2002) : The cut in State Bank of Pakistan's discount rate alone will not reduce the arbitrage factor unless the central bank allows the rupee to appreciate at a faster rate and restores the equilibrium, say treasury heads of major banks.
According to the treasury managers, businesses are borrowing US dollars at two percent all inclusive and selling them in spot, earning 17 to 18 percent per year return on the transactions. Exporters have borrowed nearly $ 600 million under the dollar finance scheme, and importers nearly $100 million, during the last three months. These dollar loans for imports will be settled from export proceeds or by inter-bank purchase.
Both the Finance Minister and the SBP Governor have been encouraging foreign currency lending to business without realising its implications for the SBP's balance sheet and the national legal tender i.e. the Pak rupee, which is reflective of national identity, said a treasurer.
“Any adverse impact on our exports or trade in general due to exogenous factors could result in business seeking extension on repayment of dollar loans and Pakistan could be faced with a crisis like the one seen in the Far East not long ago,” he warned.
In addition, it is pointed out, SBP has been selling rupees to buy dollars, on which it earns 1.75 percent per year. Banks flooded with this rupee have been investing them back in government paper at 6.4 percent. With an appreciating exchange rate for US dollar against the Pak rupee, SBP's cost of maintaining dollar reserves is said to be in excess of Rs 5 billion per quarter.
The bankers say it made economic sense to have a five percent gap between dollar and rupee lending rates when the reserves position was weak and there was persistent capital outflow from the country. But now with dollar borrowing at two percent and rupee borrowing at eight percent the gap is too big and needs to be reduced as chances of capital outflow are minimal in view of the western attitude towards the Muslim world. The economic slowdown and poor performance of stock markets in the west has blunted the lust to send money abroad, they added.
