The State Bank of Pakistan has enhanced the banking sector's existing foreign exchange dealing capacity by $100 million in order to ultimately permit oil import payments to be met from this forex inflow, instead of SBP's own forex reserves.
In a circular issued on Monday, the SBP said it had enhanced the capacity of the banks to manage increased volume of forex market transactions with the growth in trade volume from 10 to 15 percent of the paid-up capital of each bank.
The existing cap of one billion rupees on banks with higher paid-up capital has been revised to Rs 1.5 billion. This capping is necessary in order to avoid distortions in the Net Open Position (NOP) until the paid-up capital in all the banks is aligned at Rs 8 billion by 2007.
In 1999, the International Monetary Fund (IMF) had recommended fixation of the aggregate forex exposure limit at 20 percent of the paid-up capital. But the SBP had fixed it at 10 percent, with a capping at one billion rupees.
One billion Pak rupees cap at that point permitted the banks to undertake both-way transactions of around $10 million. Later, it was enhanced to $15 million, but the foreign banks were restricted to within $8 million.
Volume enhancement forex dealings will now allow individual bank to meet chunky payments without huge movements in daily rupee-dollar parity. Presently, volatility is checked through SBP intervention. According to informed sources, the current aggregate of NOP's is around $190 million. The enhancement by SBP raises the NOP aggregate to about $290 to $300 million.
Banks such as Standard Charter and the ABN Amro merged with Prime Bank have very large paid-up capital. Without capping at Rs 1.5 billion, their NOP could be 25 percent of the total aggregate. In order to avoid a dominant position to a single player, the capping was considered essential by the central bank.
The following circular was issued by SBP: "Please refer to PE Circular No 12 dated May 29, 1999 in terms of which aggregate Foreign Exchange Exposure Unit of scheduled banks was set as 01% of their Paid-up Capital under which they were asked to conduct their foreign exchange operations.
"To further enhance the capacity of Authorised Dealers in order to manage increased volume of FX Market and to match future demand in the wake of growth in trade volumes, it has been decided to revise the Foreign Exchange Exposure Limit from April 02, 2007. Accordingly, new aggregate Foreign Exchange Exposure Limit of scheduled banks would now be calculated as 15% of their Paid-up Capital with a maximum cap of PKR 1,500 million. The assigned capital required to be maintained by branches of foreign banks in Pakistan under section 13 (3) of Banking Companies Ordinance, 1962 shall be deemed paid up capital for the purpose of this circulation, in the case of banks incorporated in Pakistan the limit would cover all the branches including overseas branches if any. "The guidelines for calculating the exposure limit as conveyed in Para 4 of the aforesaid circular would remain unchanged.
"In case of increase in paid-up capital of a bank it may apply for the enhancement of its exposure limit to the State Bank of Pakistan. "New exposure limits would be advised to each bank individually through separate letters."