State Bank of Pakistan acts to stop rupee slide

UNCLAS SECTION 01 OF 02 ISLAMABAD 002428

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PREL PK
SUBJECT: State Bank of Pakistan acts to stop rupee slide

Summary
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1. (SBU) Summary: The State Bank of Pakistan (SBP) took measures on
July 8 to stop the Pakistan rupee from further decreases against the
U.S. dollar. The rupee has lost 16.8 percent of its value against
the dollar since the beginning of 2008. The State Bank of Pakistan
will now make 100 percent of oil import payments, and has suspended
afternoon sessions for all types of foreign exchange transactions by
banks with their customers and in the inter-bank market. The SBP
has also reduced advance payments against imports. The State Bank
maintains that these are only short term measures, and will not
interfere with the liberalization of the foreign exchange regime.
They are also not intended to restrict the repatriation of
dividends, profits and royalties by multinationals or foreign
companies. The SBP still sees no evidence of capital flight. End
summary.

Measures to stem the rupee's fall
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2. (SBU) The State Bank of Pakistan took a number of measures July
8 to stem the rupee's increasingly sharp slide against the U.S.
dollar. The rupee slid 2.6 percent on July 8 against the U.S.
dollar, and closed at an all-time low at 72.85/90. It fell to 73.85
against the dollar on July 8 in futures trading. The rupee
recovered a bit and stood at 70.99 versus dollar on July 17. Since
January 2008, the rupee depreciated close to 17 percent against the
dollar. Traders attributed the rupee fall to foreign exchange
shortages due to forward buying, increasing oil prices requiring
additional foreign exchange, and decreased foreign exchange inflows.


Reducing advance payments on imports
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3. (SBU) The SBP has reduced advance payments against imports to 25
per cent from 50 per cent. Importers were previously allowed to buy
dollars in advance for up to 50 percent of the goods' import value.
The SBP now permits advance foreign exchange purchases to cover only
25 percent of the FOB (Freight on Board) or CFR (Cost and Freight)
value of the imported goods. However, the SBP is permitting dealers
to honor previous commitments. The SBP has taken these measures
after continuous depreciation of rupee in the inter-bank as well as
open market. Through an amendment of the Exchange Companies Rules
and Regulations, the SBP has further strengthened its monitoring
mechanism for transactions made through exchange companies to stem
the decline in foreign exchange availability and any possible
capital flight.

SBP to provide foreign exchange for oil imports
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4. (SBU) The central bank will now provide foreign exchange to banks
for the import of all categories of oil to reduce the shortages that
the increased price of petroleum had caused in the inter-bank
market. SBP officials told Econoff that the SBP was making 100
percent of oil import payments prior to July 2007, but had shifted
20 percent of these payments to the inter-bank market after July

2007. Once again the SBP has taken over to make full oil import
payments due to supply pressure on the inter-bank market.

Trading hours curtailed
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5. (SBU) The SBP has also reduced the time for all types of foreign
exchange transactions by banks with their customers and in the
inter-bank market until 2:00 pm Monday through Thursday and until
1:00 pm Friday and Saturday. Banks are, however, allowed to do
foreign exchange swap transactions in the inter-bank market until
4:30 pm Monday through Friday and until 1:00 pm on Saturday.

Prior approval for transactions over USD 50,000
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6. (SBU) In addition, prior State Bank approval for all transactions

ISLAMABAD 00002428 002 OF 002


USD 50,000 or more (or the equivalent in other foreign currencies)
to individuals is now necessary. However, this requirement will not
be applicable to sale of foreign currency to banks and other
exchange companies. The central bank has advised exchange companies
to forward requests to SBP with details of the transaction including
the customer's name, address, national identity card number, amount
and purpose of the transaction. Comment: This measure will also
assist in anti-money laundering and terrorism financing efforts.
End comment.

SBP says new measures are temporary
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7. (SBU) State Bank of Pakistan Foreign Exchange Department
officials told Econoff that these are short term measures designed
to control the rupee slide. They said that the rupee was
depreciating rapidly and has depreciated close to 17 percent since
January 2008, attributing the decline to political instability.
They observed that these measures will not impact or reverse the
liberalization of the foreign exchange regime because spot
transactions in the are still permitted. Only the forward cover
payments, which were designed to lock in the exchange rate have been
suspended and advance payments against letters of credit for import
have been reduced to 25 percent from 50 percent. They rejected the
argument that the bank's measures will have a negative impact on
importers.

Company remittances not affected
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8. (SBU) The SBP maintains that remittances of profits and
royalties by multinational companies will not be affected since the
SBP does not require approval for foreign exchange to repatriate
dividends, profits or royalties. Only the exchange companies now
require prior SBP approval for individuals who wish to send $50,000
or more overseas. The SBP pointed out that multinationals usually
remit their money through banks, while individuals buy foreign
exchange from exchange companies for overseas travel or other needs.


Comment
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9. (SBU) Comment: Despite the State Bank's claim that the fall in
the rupee is due to continuing political uncertainty in Pakistan,
there are significant structural problems driving its precipitous
decline over the past few weeks. The rupee cannot stabilize or
maintain its current value unless structural imbalances such as the
large import-export gap and the current account deficit are brought
under control. The rupee has decreased 16.8 percent since the
beginning of the year.


10. (SBU) Comment continued: While there is no evidence of capital
flight according to SBP sources, most portfolio investment has left,
and foreign exchange inflows have slowed down significantly.
Repatriation of profits and royalties rose by 11.9 percent between
July 2007 and May 2008, resulting in a USD 847 million outflow.
However, we do not see this increase as particularly significant,
given the amount of foreign investment in Pakistan, its
concentration in the profitable banking and telecoms sectors, and
the fact that most companies had an extremely profitable 2007. As a
result of the decreased foreign inflows and increased oil prices, a
sizable gap between demand and supply now exists in the foreign
exchange market, resulting in the rapid depreciation of rupee. The
SBP will now make 100 percent payments for oil imports, which will
further drain its foreign exchange reserves, thus putting additional
pressure on the beleaguered rupee. End comment.

PATTERSON