A SURGE in export and home remittances in February encouraged exporters to offload future export proceeds over the week ending March 11. This strengthened the rupee and enabled the State Bank of Pakistan to purchase dollars from banks. Bankers said that interest rates remained stable on expansion in private sector credit and increase in government borrowings from banks. A slight easing in inflation during the last month and a cut in government’s inflationary borrowing from the central bank led many bankers to believe that the SBP would make no further increase in its policy rate. The SBP is scheduled to review the rate by the end of this month for April-May 2011.

“In my view, the rupee hit a new high of 85.05 to the dollar on March 8 primarily due to forward sale of export dollars,” said treasurer of a large local bank. “News about a dramatic rise in exports and remittances made many exporters think it was time for forward export dollars selling at the current exchange rates to gain advantage.”

Pakistan’s export earnings swelled to $2.2 billion in February this year up 42 per cent from February last year. Home remittances also surged 43 per cent to $845 million as Pakistanis settled in the Middle East transferred parts of their savings back home anticipating further troubles there.

During the week that ended on March 11 the government borrowed Rs174 billion through sales of treasury bills primarily to banks and development finance institutions. Breaking from the trend seen so far during this fiscal year banks made more investment in six-month treasury bills and not in three-month bills. Six-month TBs raised Rs108 billion for the government or more than 60 per cent of its total borrowings.

Cut-off yield on the bills remained unchanged at 13.69 per cent. “This is a clear signal that banks are not expecting further increase in the SBP policy rate,” said chief money market dealer at a local bank. “We believe the central bank would leave the policy rate unchanged at 14 per cent when it reviews the monetary policy towards the end of March.”

Consumer Price Index depicted a decline of 0.74 per cent in February over January this year. And year-on-year inflation last month accelerated to 12.9 per cent—its slowest pace since August 2010.

Bankers say containment of growth in government’ inflationary borrowing from the SBP has played a role in easing inflation.

From January this year the government has been borrowing less from the central bank and more from banks. Latest data show that the federal government borrowed Rs130 billion from the SBP and Rs270 billion from banks in about eight months of the current fiscal year up to February 26. The TBs auction of Rs174 billion conducted during the week under review is expected to help the government keep a lid on its inflationary borrowing from the central bank.

Bankers said private sector credit offtake that picked up pace since October 2010 continued gathering momentum during the months that followed and the trend is still on. They said historically high prices of commodities especially cotton was the main driving force behind strong demand for private sector credit. “But since January private borrowing has been growing a bit faster not only because of cotton and textile sectors but also due to stronger demand from almost all other export-oriented sectors as exports have rebounded”, said head of credit division of a large local bank.

Banks’ net lending to private sector in about eight months of the current fiscal year reached Rs209 billion—up more than 50 per cent over such lending reported in the same period of last fiscal year.

“In last fiscal year banks were shy of making large loans to the private sector fearing defaults as the world had not come out of the recession in the first half of the year (July-December 2009) and our stock of bad loans was large” explained head of a commercial bank.

“But as global recession started easing since January last year and as we put our financial house back in order in next few quarters we started making fresh loans in a big way from October. This was, of course, timed with the beginning of seasonal demand in private sector credit in our domestic market.”

Bankers say they continue to see strong demand for private sector credit not only from cotton and textiles but from a variety of other sectors like fertiliser-making and food processing industries, auto manufacturing and personal finance, etc.

They say that recently started wheat exports have triggered additional demand for private sector’s bank credit adding that government’s procurement agencies have also come forward to get bank loans for purchase of wheat from farmers.

Benchmark KIBOR of various tenures remained stable or eased slightly during the week under review. Bankers opine that expansion in private sector credit and increase in government borrowing amidst sufficient liquidity in inter-bank market should keep interest rates stable in coming weeks.