ISLAMABAD: The State Bank of Pakistan (SBP) has started to encourage banks to float dollar-denominated international bonds and raise money in order to make import payments that are hefty, a move aimed at offsetting the impact of a growing import bill on the country’s official foreign currency reserves that have started to come under pressure.
However, analysts see it as a highly risky move that will expose the banks to exchange rate risks, if the banks do not pass on the risks to the importers.
The move comes as the country’s foreign currency reserves, largely built through expensive foreign borrowings, have started to deplete once again, barely a few months after the expiry of the IMF programme, due to higher foreign debt payments and higher than anticipated current account deficit -the gap between foreign payments and receipts.
The central bank verbally conveyed to some banks that they should start thinking of meeting financing requirements of the Letter of Credit (L/C) - a letter issued by a bank to a foreign bank to serve as a guarantee for payment - by floating bonds in the international markets, said sources in the banking industry. These include government-owned as well as private commercial banks.
Sources said the central bank wanted that payments made against the L/Cs opened for import of machinery for mega projects should be ideally arranged from abroad. The options available to the banks were either to arrange loans from foreign banks or tap international bond markets, said the sources.
They said that in case of borrowings from other foreign banks, the risk was directly of the importers. However, the borrowings through bonds would expose the banks directly to these risks.
They said that the SBP was of the view that Pakistani banks have better credit ratings and can avail relatively cheap financing.
In October last year, Moody’s Investors Service maintained its stable outlook on Pakistan’s banking system, reflecting the rating agency’s expectation that the country’s banks will continue to benefit from a stable deposit base.
The purpose was to shift the pressure from the inter-bank market to other sources of financing, they added. The country’s import bill has started ballooning due to surge in imports of machinery for mega projects and increase in crude oil prices.
In January, the monthly import bill increased to $4.74 billion - higher by 37% over a year ago, according to the national data collecting agency.
All authorised commercial and non-commercial payments, including import payments, are executed through the interbank market.
The sharp decline in the official foreign currency reserves since the expiry of the IMF programme is the reason behind a change in the central bank’s mood. During the week ending February 10, the SBP’s reserves decreased by another $224 million to $16.993 billion, falling below the $17 billion mark for the first time in nine months.
Cumulatively, the official foreign currency reserves have depleted by over $1.9 billion during the last three-and-a-half months.
However, if banks take the central bank’s advice, they would be exposed to huge currency fluctuation risks, said banking industry experts. Foreign borrowings for settling import payments would inherently carry huge risks.
They said the move was not a logical one. In this case, the risk will be in rupee terms, which means a risk-cover cost of about 8% in addition to the adverse implications of rupee depreciation against the US dollar.
They said that usually the banks float international bonds for meeting financing needs of export refinancing.
Under the existing foreign exchange regime in Pakistan, all foreign exchange inflows against commercial and non-commercial transactions such as exports, remittances, foreign investment are received in the interbank market, said Abid Qamar, the chief spokesperson of the central bank.
He said that under Foreign Exchange regulations, the SBP is not required to provide foreign currency for such payments. Likewise, the authorised dealers are not required to surrender the foreign exchange to the State Bank, which they receive on account of exports, remittances etc.
The SBP occasionally intervenes in the foreign currency market, primarily with objectives to build its foreign exchange reserves and/or deal with excessive volatility in the interbank FX market, he added.
Published in The Express Tribune, February 17th, 2017.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.