KARACHI, Sept 17: The shortage of US dollars in the inter-bank market has led the rupee to fall to a record low, creating fears that banks might not be able to honour their foreign commitments.

It means that a threat of default is looming.

Rupee shed 70 paisa against the greenback to stay at Rs77.70 on Wednesday. The rupee was at the record low as the last record was Rs77.45.

Bankers said the frequent siphoning of dollars from inter-bank market by the State Bank was causing extremely difficult situation for banks to continue to do normal business.

According to data available from the State Bank’s website, Pakistan’s total Forex reserves amounted to $9.101 billion as of Sept 5. Of these, SBP reserves were $5.722 billion while banks’ holdings of foreign currency were $3.378 billion.

Banks’ holdings of foreign currency are at their highest-ever levels, according to data available.

In spite of this, bank treasurers and dealers say there is a shortage of dollars in the market.

According to the report titled “International reserves and foreign currency liquidity” posted on the SBP website, the SBP had an aggregate short position of $1.765 billion in foreign currency, including forward leg of currency swaps.

Simply it means that the SBP has picked up $1.765 billion from the inter-bank market under Forex swap agreements with commitment to pay back these dollars at a future date.

In addition, the SBP also levies a cumulative reserve of 20 per cent on all foreign currency deposits held by banks. This figure amounted to $868 million as of August 2008, according to the report titled “FE-25 deposits and utilisation” available on the SBP website.

“Banks are left with only $745 million in total to run their daily commercial business,” said a senior banker.

Bankers said what is also worrying is that over the past week or so, the SBP has been actively intervening in the inter-bank market and either buying dollars outright from the market or entering into currency swaps with banks and draining away even more dollars from the banking system.

“As a result, rupee has been weakening substantially since there is clearly not enough supply of dollars in the market for banks to carry on normal business,” said a bank treasurer.

It is difficult to imagine how more than 30 banks are supposed to carry on commercial business with only $745 million available to them in their US dollar accounts, he said. This drain of dollars has already caused rupee to weaken to 77.70 against the dollar on Wednesday, he said.

Bankers were of the view that siphoning-off of dollars from the market would only weaken the rupee further.

“It is feared by a number of local banks that if the SBP continues its intervention via currency swaps in the inter-bank market, banks will run short of US dollars and may not be able to meet commitments to foreign counterparts or effectively default on foreign currency payments,” said the treasurer.

While showing disappointment over State Bank’s role in the affairs, the banks were hoping that this situation would be resolved on an immediate basis “otherwise the banking sector may face dire consequences.”