Steps to stem dollarisation

By Haris Zamir Two bold decisions emerged from the Ministry Of Finance and the State Bank of Pakistan. Although the banking sector would not benefit from them, the measures would help discourage dollarisation in the country and promote investment. Last time the revision in deposit rates was made in April 2012, rising to 5-6 percent. Since then the central bank steadily made two moves in deposit rates. The deposit rates had been ascertained on the monthly average of deposits and the recent one it linked to the repo rate, which showed that whenever there is any movement deposit rates have some variation. With interest rates showing an upward trend, deposit rates are bound to increase. The bank shares following this decision witnessed substantial beating at the Karachi Stock Exchange and a billion rupees worth of market capitalisation whipped at this group where several bank shares closed on lower circuit. The State Bank has notified an increase in the minimum profit rate on saving accounts by 50bps to 6.5 percent, linking it with the State Bank repo rate. With effect from October 1, the minimum profit rate on savings account is 50bps lower than the prevailing SBP repo rate. The SBP had recently set an interest rate corridor of 250 bps between the SBP repo rate (floor) and the SBP reverse repo (ceiling) or Discount Rate. SBP repo rate is the rate at which commercial banks deposit their excess cash with the SBP on overnight basis, while the SBP reverse repo is the rate at which the commercial banks borrow money from the SBP. Hence, the banks will now be paying minimum profit rate of 6.5 percent which is 50bps lower than SBP repo rate of 7 percent and 300bps lower than the prevailing discount rate or the SBP reverse repo rate. This also means that the minimum profit rates on savings accounts will also be revised with any revision in the SBP reverse repo rate or discount rate. The raise in deposit rate from 6 percent to 6.50 percent to clip revenues of banks in the range of Rs11 billion to Rs14 billion on the older stock of deposits held at the institutions. But on the brighter side, more investors will eventually be encouraged to park their earnings at banks to get higher rates, which would help banks in the long run. This would help dilute the pruning. Another step by the Ministry of Finance is allowing the National Savings Directorate to alter the savings rates. The directorate, after the ministryís approval, raised rates in its most commonly known savings schemes for the small-time savers. Rates announced earlier on the national saving schemes were higher as it failed to get consent from the ministry of finance. However, according to new rates, saving account rates to be increased to 7.25 percent instead of proposed 7.5 percent from 6 percent. The new rates for short-term savings certificates of three months, six months and one year were proposed to be increased at 8.85 percent, 8.95 percent and 9 percent, respectively, from earlier 8.45 percent, 8.5 percent and 8.55 percent, respectively. The rates of special savings certificates (three years) increased to 10.75 percent, instead of the 11 percent proposed by the CDNS from existing 8.92 percent, while the rates of regular income certificates (five years) were increased to 11.22 percent, instead of the proposed 11.4 percent from 9.48 percent. Rates of Defence Savings Certificates have been increased to 11.61 percent, instead of the proposed 11.87 percent from the existing 10.36 percent. The rates of specialised savings schemes, Bahbood Savings Certificates and Pensioners’ Benefit Account, were proposed to be raised at 13.44 percent instead of proposed 13.68 percent from 12.24 percent. These rates will also curb rupee investments in the foreign exchange market where the dollar was costlier by huge margin but intervention from the central bank and the iron hand of the authorities will tighten the screws. Numbers are not yet known, but many will feel the heat of the central bank, as the banksí treasurers would be penalized as they were would be accused of speculation and creating panic in the market. However, when the dollar start climbing from Rs105 to Rs106 and daily losing Re1 to the dollar, and in one session more Rs2 to a dollar, which awakened the officials of the Ministry of Finance and the central bank. Were sleeping when the dollar crossed Rs 100? Why did they wait for the dollar to hit Rs111.50? The setback has been costly: the countryís imports during the fiscal year remained at the level of the 2012-13 fiscal year, the country has to pay additional Rs460 billion to import the same quantity of crude oil, petroleum products, machinery, steel and food products. A number of steps could be taken by the Ministry of Finance on a war footing to build up reserves and stem the rupeeís slide by allowing the Directorate of National Savings to tap the earnings of overseas Pakistanis. The profit rate globally ranged from 8 to 9 percent per annum. The current revised rate will attract investors to place their funds, but only if some new scheme is launched to attract the expatriates. For example, National Saving through their portal should launch products where foreign currency would be invested and for a couple of years they would get profit in Pakistan to their registered relatives or any nominee in Pakistan rupees and dollar bonds for domestic investors. Currently, in excess of 5 billion dollars have been placed with the private banks in order to generate dollar deposits. The government should come out with a plan to increase the flow of the greenbacks. The Indian currency lost about 20 percent against the dollar in this calendar year, mainly because of the widening current account deficit which was $82 billion in the last fiscal year. This year the expected deficit is $70 billion. The Pakistani rupee lost 13.36 percent since Jan 1, but it recovered by 5 percent on Thursday when the State Bank injected up to $50-$60 million in the interbank market. The State Bank must understand regional developments for protection of the local currency against the dollar. A detailed study on the strategy of the Reserve Bank of India is required. In a bid to attract non-resident Indians deposits, the RBI liberalised bank deposit schemes and some banks raised interest rates for overseas Indians this month. To spur banks to attract more dollar deposits from non-resident Indians, the RBI exempted these deposits from the requirements of cash reserve ratio and statutory liquidity ratio. Following these measures of the RBI, the State Bank can take decisions to improve deposits as well as remittances being sent by overseas Pakistanis, said a banker. The Indian government increased the import duty on gold and silver to 10 percent to rein in imports. The RBI tightened norms for gold imports by linking them to exports. In Pakistan, the Finance Ministry suspended import of gold for one month in August, but resumed its imports without imposing any duty. Currency dealers are complaining that gold smugglers have once again become active. Recently currency dealers asked for a 15 percent import duty on gold. India tightened credit availability for gold imports. The RBI reduced the number of dollars resident Indians can take out of the country from $200,000 to $75,000 in a financial year. The governor of the State Bank, Yaseen Anwar, told the Senate Standing Committee on Finance that around 25 million dollars per day have been transferred illegally. It appears despite the authorities being aware of the smuggling of dollars, the machinery failed to stop the outflow. The writer is head of the business desk at GEO TV