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86 percent growth in foreign exchange reserves helps strengthen rupee

KARACHI (December 30 2002) : The country's foreign currency reserves in the calendar year 2002 recorded an unprecedented improvement of 86 percent, strengthening the value of the Pakistani currency against the dollar by 2.5 percent at the interbank market and by 5 percent in the open market.

The year was extraordinary for the rupee. The global crackdown on Hundi network led to the collapse of the kerb market premium, a reversal of market devaluation expectations, and a consequent U-turn in the exchange rate management strategy of the State Bank of Pakistan.

All of which set the basis for accelerating liberalisation of the foreign exchange market, and particularly, the removal of segmentation between the interbank and kerb markets.

The foreign currency reserves of the country recorded an improvement of 86 percent to $9.104 billion, including held by the commercial banks, as compared with $4.887 billion on January 1, 2002.

The Pakistani rupee during the course rose to 58.30 to a dollar from 59.75 on January 1, 2002 at the interbank market while at the open market it recorded an improvement of Rs 2.95 to Rs 58.15 to a dollar in just a year period.

According to an analyst, the rise in foreign currency reserves and strengthening of rupee was the continuous flow of dollars from the overseas Pakistanis and aid and loans from the international donor agencies.

IMF LOANS: The International Monetary Fund approved loans worth $1.3 billion for Pakistan for the period of three year.

The government's economic policies and reforms to put them on track helped won the confidence of international donor agencies and during the year several missions visited the country, showing satisfaction over the plan designed by the government in meeting the targets set for meeting revenue, exports, agriculture, imports, foreign exchange stability and foreign currency reserves.

The IMF during the year released nearly $445 million to Pakistan from $1.3 billion after the country successfully for the first time completed the standby arrangement of $596 million last year.

The overseas Pakistanis send more money in the country from the last couple of years as the US government decided to crack down on possible funding avenues for terrorist attacks.

Moreover, UAE central bank introduced documentation requirement for any outward or inward flows.

These developments not only accelerated the pace of dollars into the country but also led to the collapse of the kerb market premium.

Couple of years, the difference between the official and unofficial rates average around four rupees, collapse changed the whole pattern and on several occasions, the kerb rate for cash transactions even dipped below the interbank rates during the year.

The exchange rate of other regional countries (Sri Lanka, India and Bangladesh) did not strengthen following the crack down on the Hundi network.

This simply suggests that remittances in these countries are not under-reported by high margins, and therefore, the size of their informal forex market is small relative to that in Pakistan, an analyst said.

PRIME OBJECTIVE: The central bank during the year bought dollars from the open and interbank markets, mostly from the latter.

The prime objective of the purchases from the interbank market was to ensure that the stable exchange rate did not erode the competitiveness of the Pakistani exporters.

This was important as exporters are already facing the loss of the export orders and imposition of a war risk premium on shipments, and in some cases, are unable to meet their commitments.

“With the difference between the kerb and interbank markets narrowed during the year, the central bank made another move and plans to merge both these markets,” a dealer said.

New rules were promulgated and advised foreign currency dealers and banks to establish foreign exchange companies and directed that by 2004 June, either foreign currency dealers raised their capital to Rs 100 million or go for merger with banks or merge with other moneychangers.

Analysts believe as the flow of remittance has improved a lot and in five months it has been doubled to $1.7 billion, the rupee would strengthen further in the new year and the government will reach the target of $10 billion as foreign currency reserves by end of the country's fiscal year, he added.

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