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Sharp decline in SBP profitability in last four years

KARACHI (November 15 2003): Profitability of State Bank has sharply declined in the last four years mainly on account of exchange rate fluctuations, along with a number of other reasons, but the main beneficiary was the national economy, which remained stable with high foreign exchange reserves and low cost government borrowing.

The State Bank on Friday issued second volume of annual report, which deals with SBP's performance.

“A number of developments have impacted SBP's profitability in recent years, which varied from Rs 36.088 billion earned for the year 1999-2000 to an amount of Rs 243.1 million earned for the year 2002-03,” said the SBP report.

The country's economy underwent significant changes during the last few years, having wide-ranging effects on a number of economic and financial areas, including the profitability of the State Bank, said the report.

There are two heads of accounts affecting the Bank's profitability. One is discount on MTBs, and the other is 'Gains or Losses' on Foreign Exchange.

“The steep rise in the value of Pak rupee has perhaps been the most significant development on the economic front during the last few years,” said the report.

In the post-9/11 scenario Pak rupee saw rapid exchange rate appreciation, in sharp contrast with a continuously depreciating exchange rate for the past many decades.

The rupee was at 52 per US dollar in 1999-00 and it was Rs 63.98 in 2000-01. It came to Rs 60.02 in 2001-02 and settled at Rs 57.81 in 2002-03.

The interest rates in the period mentioned declined from 7.22 percent in 1999-00 to 1.66 percent in 2002-03.

However, home remittances gradually increased from 984 million dollars to 4.237 billion dollars.

Foreign exchange reserves held with the SBP are carried at the cost at which they were purchased from the market.

Subsequently, changes in the exchange rate affected SBP's profitability, when the balances were re-valued on mark-to-mark basis, said the report.

Previously, when the rupee was depreciating, the SBP realised exchange gains on the its Gross Foreign Assets, although, due to the fact that Bank's Foreign Liabilities far exceeded the Net Foreign Assets, the net impact on the bank's profitability remained negative in the form of a net exchange loss.

However, when the rupee took a reverse turn and started appreciating sharply, SBP, as per the requirements of international accounting standard, had to book revaluation losses on its Gross Foreign Assets, since the prevailing exchange rate in the market at the year end was less than the rates at which purchases were made.

Moreover, the Net Foreign Assets position of the Bank also remained positive due to the unprecedented increase in the foreign exchange reserves held, adding further to the net exchange loss.

“On the other hand, interest rates in the international foreign exchange market continued a declining trend and SBP's income on its investment of foreign exchange assets was therefore significantly lower,” said the report.

In the year 2000-01, the aggregate exchange loss of Rs 49 billion was incurred due to provision of forward cover on Foreign Currency Accounts-Exchange Risk Coverage Scheme (Rs 31.3 billion), open market operations including currency swaps (Rs 20.1 billion) and revaluation of net foreign assets (Rs 8.6 billion).

“These were partially offset by Rs 10.9 billion earned as forward cover fees charged on foreign currency accounts,” the report added.

The massive purchases of foreign exchange by the SBP caused excess liquidity in the banking sector, which finally resulted in the decline of the interest rates.

The sharp decline in SBP's holdings of government securities significantly affected SBP's profitability, said the SBP report.

“In fact, the decline in SBP's holdings of government securities and the drop in the rates of return are the prime reasons behind the sharp decline in SBP's income during 2002-03,” said the report.

The report concluded that the profitability of the SBP is dependent on private capital flows, reserves level, exchange rate movement and interest rates.

“Although the overall impact of SBP's policies during 1999-2000 to 2002-03 resulted in decline in its profitability, as consequence of the these policies, the economy has been able to reap benefits in the form of competitive exports, reduced cost of government borrowing, stability in exchange rate and, most important, a significant rise in the foreign exchange reserves of the country,” said the report.

“Besides, the reduced cost of borrowing for the government has actually set off the potential financial impact of SBP's reduced profitability on government budgetary support,” the report said.

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