Monetary Policy, July 2011 - At A Glance
Monday, August 1, 2011
1. A relative decline in average CPI inflation compared to earlier projections and a gradual buildup of foreign exchange reserves provide a modicum of macroeconomic stability as the economy begins a new fiscal year. These developments appear more pronounced in the backdrop of devastating floods of early FY11 and a significant shortfall in external financial inflows. While the containment of government borrowings from SBP in H2-FY11 played its part in relatively improving the inflation outlook, a substantial increase in export prices and steadily rising remittances facilitated the reserve accumulation. A cumulative increase of 150 basis points in SBP’s policy rate during H1-FY11 and a proactive management of financial markets also helped in realizing these incremental gains.
2. A lower than projected inflation does not provide an enduring source of comfort for SBP as it continues to show a high degree of persistence at an elevated level. The 12-month moving average of CPI inflation was 13.9 percent in June 2011, exactly the same level observed in every subsequent month since December 2010, and 4.4 percentage points higher than the target for FY11. This level of inflation is not limited to the prices of few items and is in fact quite broad based, indicating that expectations of inflation are fairly entrenched in the economy. Thus, a meaningful reduction in inflation would require consistent and credible implementation of monetary and fiscal policies.
3. Acknowledging the persistence of inflation, the government has announced an inflation target of 12 percent for FY12. The government has also provided in the Medium Term Budgetary Framework (MTBF) a desired path of inflation of 9.5 percent and 8 percent for the subsequent two years. Conditional upon factors such as adjustments in the administered prices of electricity and oil and a projected broad money (M2) growth of 15 to 16 percent SBP’s forecast of average inflation ranges between 11 and 12 percent during FY12.
4. A close inspection of the overall expansion in monetary aggregates and their changing composition is important to understand both the moderate decline and persistence of inflation. For instance, reserve money grew by 17.1 percent in FY11 with 82 percent of the expansion coming from an increase in the Net foreign Assets (NFA) of SBP. Accumulation in NFA is a reflection of the external current account surplus and build-up of reserves by the SBP. A surplus in the external current account, in turn, is an indication of somewhat restrained aggregate demand in the economy and therefore relative stability in inflation, albeit at a high level. Retirement of government borrowings from SBP towards the end of both the third and fourth quarter of FY11 has also been helpful in improving the inflation outlook.
5. The government borrowing from scheduled banks, however, has increased substantially. It grew by 74.5 percent in FY11 and contributed 65 percent to the 15.9 percent growth in broad money (M2). The growth in private sector credit, on the other hand, was only 4 percent with negligible demand for fixed investment. These monetary trends show that the decline in aggregate demand is less than desirable and expansion in productive capacity of the economy remains weak. Both these factors help understand the persistence of inflation. The falling productivity due to severe energy shortages and deteriorating law and order conditions together with unanticipated and sporadic adjustments in the administered prices are also adding inertia to inflation.
6. The borrowing needs of the government from the scheduled banks were mostly met through short term instruments. This has increased the rollover requirements substantially and has complicated liquidity management. Apart from mitigating the resulting volatility in the money market overnight repo rate and keeping it consistent with the monetary policy stance, SBP’s liquidity operations had to strike a difficult balance among multiple and competing considerations. These include stability of the payments system, adequate availability of liquidity in the market, and build up of foreign exchange reserves.
7. The underlying reasons of growing government borrowings are structural and not specific to FY11 though it must be acknowledged that FY11 was a difficult year given floods and other pressing spending needs. The consolidated fiscal data has not been released, however, provisional estimates from the financing side indicate that the fiscal deficit in FY11 may have reached close to Rs1127 billion or 6.2 percent of GDP. Excluding the one-off payment of Rs120 billion to partially settle the circular debt in the energy sector, the fiscal deficit in FY11 comes down to 5.6 percent of GDP.
8. The main structural weaknesses causing this high level of fiscal deficit and a rise in total debt are low tax to GDP ratio and rigid current expenditures. While exemptions and ineffective taxation of major parts of income generating sectors of the economy are limiting the revenue generation capacity, continued provision of financial support to the loss making Public Sector Enterprises (PSEs) and untargeted subsidies are keeping the current expenditures under pressure. Consequently, the tax to GDP ratio remains low, 8.6 percent in FY11, and any fiscal adjustment inevitably results in cuts in the development expenditures, which is not desirable given the infrastructure needs of the economy.
9. These considerations underscore the need to accelerate the implementation of fiscal reforms currently being considered by the government. A path of fiscal deficit in the next three fiscal years has been provided in the Medium Term Budgetary Framework (MTBF), which shows a budget deficit target of 4 percent for FY12. Moreover, the government is planning to reduce the revenue deficit to zero in FY12 with a projected surplus in the following two years. This assumes an ambitious increase in tax collection by the Federal Board of Revenue (FBR). An effective implementation of fiscal reforms, especially those related to broadening of the tax base, and better coordination with the provinces are urgently required to implement this plan.
10. Unlike fiscal accounts the position of the external current account improved considerably in FY11 and contrary to earlier projections a surplus of $542 million has been realized. A significant and unexpected growth of 29.4 percent in exports and a robust growth in workers’ remittances, which now stand at $11.2 billion, are the primary factors responsible for this improvement. Fragile global economic conditions and dominance of price effect in both exports and imports, which was more pronounced in H2-FY11, has increased exposure of the economy to movements in international commodity prices.
11. Incorporating the recent declining trend in international cotton prices and likely continuation of international oil prices around $100 per barrel, projected growth rate of exports is 6 to 7 percent and that of imports is 10.5 to 11.5 percent. The external current account is expected to show a modest deficit of 0.8 percent of GDP in FY12. Given an increase in debt obligations and continued suspension of IMF’s Stand-By Arrangement (SBA) financing even a small external current account deficit could pose challenges in terms of maintaining an upward trajectory of SBP’s foreign exchange reserves.
12. The main risk in external accounts emanates from the declining capital and financial flows, which have dropped to $1.8 billion in FY11 from $5.3 billion in FY10. The perceived high country risk, relative to other emerging market economies, is the main factor underlying the reluctance of private foreign investors to invest in the country. The delays in implementation of economic reforms, on the other hand, resulted in shortfalls in estimated foreign loans. Nonetheless, by end-June 2011, SBP’s liquid foreign exchange reserves have increased to $14.8 billion from $13.0 billion at end-June 2010. A reflection of an improved overall external position can also be seen in a relatively stable exchange rate; Pak rupee marginally depreciated by 0.5 percent against the US dollar in FY11.
13. The provisional National Income Accounts, however, do not share the positive aspects of external accounts. The devastating floods at the start of FY11 were a serious setback for economic growth in the economy already beset by continuing energy shortages and deteriorating law and order conditions. As a result, real GDP growth of 2.4 percent fell short of the target by more than 2 percentage points. The main casualty was the real private investment expenditures. The gross fixed capital formation by the private sector contracted by 3.1 percent, leading to a decline in total gross investment to 13.4 percent of GDP; the lowest level since FY74. However, due to strong growth in real consumption expenditures, aggregate domestic demand grew by 5.9 percent.
14. At the same time, national savings have increased to 13.8 percent of GDP, mainly due to net factor income from abroad. Consequently, the gap between national savings and investment as a percent of GDP has turned marginally positive. Since this positive gap is mostly due to falling investment, it cannot be considered as an encouraging development from the perspective of reviving economic activities and sustaining high growth over the medium term.
15. Against this backdrop, SBP has decided to reduce the policy rate by 50 basis points to 13.5 percent effective 1st August 2011. The key parameter in this assessment is the outlook of inflation that indicates that average inflation in FY12 is expected to remain in line with the announced target. No adjustment in the interest rate would have entailed further tightening of monetary policy in real terms, which is not warranted given the decline in private investment. Moreover, despite fiscal slippages, the government has adhered to restricting the stock of its borrowings from SBP to Rs1155 billion (on cash basis). In fact, the government retired these borrowings compared to both the end-June 2010 level as well as the mutually agreed limit of end-September 2010 level. The government has also expressed its commitment to continue with a stance of zero borrowings from SBP in yearly flow terms in FY12, which bodes well for anchoring inflation expectations. However, the developments related to expected financial inflows and pattern of government borrowings from scheduled banks will need to be monitored closely to assess potential risks for macroeconomic stability.
Labels: Monetary Policy, Pakistan Economy, Treasury
posted @ 4:28 PM,
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Money Market and General Updates - 04-11-2010
Friday, November 5, 2010
Money Market
Cut off yield of six months T-Bill inched upward by five basis points to 13.1648 percent from 13.1193 percent while Three months T-Bill stood at the same place at 12.7933 percent. Having auction target of Rs 150 billion and market maturities of nearly Rs 180 billion, market participated with over Rs 234 billion with major participation in three months i.e. over Rs 154 billion while over Rs 71.70 in six months and just Rs 8 billion in one year tenor. State Bank accepted total bids worth Rs 166 billion with Rs 96 billion in three months and Rs 66 billion in six months. Bids worth Rs 3.0 billion were accepted in twelve months tenor and the cut off arrived at 13.2353 percent.
General News
LPG prices were raised by Rs 9.60 per Kg to Rs 95 per Kg .The rise in price is a result of possibly increased consumption of LPG in winter season and local producers are taking advantage of that. The rise has come at a time when petroleum products prices have just been raised in the country.
United States’ Central Bank, Federal Reserve (Fed) said on Wednesday, that it would some $600 billion government bonds to sustain the ailing US economy. Fed is continuing with near zero interest rates, lowering
borrowing cost for American consumers and businesses which are facing the music after recession. Moreover according to Fed, economy is “slow”, employers are not still not quote eager to add to payrolls and inflation is slow.
Despite of consistent rise in energy pricesby the government , IMF is not impressed with the energy sector reforms and implementation of Reformed General Sales Tax (RGST) and has asked the authrities to take severe actions to meet pre agreed targets.
Labels: Economy and Business, Pakistan Economy, Treasury
posted @ 12:01 PM,
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Hedging Technique - Forward Contracts
Tuesday, October 13, 2009
Query from Abdul Haseeb
I want to ask regarding hedging techniques, if a company import raw material and pay their debt after two months from receiving of goods by this means the company may bear exchange loss due to price fluctuation risk, In my opinion this... type of risk can be mitigate through hedging techniques such as forward contacts. Please let me know that forward contracts are permissible now a days?
Comment: No, These days State Bank of Pakistan does not allow to book forward rates against imports as this transaction was intentially used for forged transaction.
I want to ask regarding hedging techniques, if a company import raw material and pay their debt after two months from receiving of goods by this means the company may bear exchange loss due to price fluctuation risk, In my opinion this... type of risk can be mitigate through hedging techniques such as forward contacts. Please let me know that forward contracts are permissible now a days?
Comment: No, These days State Bank of Pakistan does not allow to book forward rates against imports as this transaction was intentially used for forged transaction.
posted @ 12:41 PM,
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Difference Between Money Market and Capital Market
Thursday, September 24, 2009
Money market is term used for the trading platform for the financial institutions, its virtual market which does not exist physically. All all the transactions between the banks and financial institutions (like REPOs, Reverse REPOs, overnight lending) are undertaken as money market transactions and are executed on telephone, fax, Reuters, e-mails and similar comunications links i.e. market itself does not physically exists.
Capital Market is term used for the physical trading of capital instruments like equities, bonds, derivatives etc. This market always physically exists and the best example is Stock Exchange.
Capital Market is term used for the physical trading of capital instruments like equities, bonds, derivatives etc. This market always physically exists and the best example is Stock Exchange.
A capital market is a market for securities (both debt and equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is lent for periods longer than a year[1], as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.
Capital markets consist of the primary market and the secondary market. The primary markets are where new stock and bonds issues are sold (via underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or trader to another, usually on a securities exchange, over the counter, or elsewhere.
Hope this clarifies
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity
posted @ 11:35 AM,
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Cash Management or Treasury Management
Wednesday, September 2, 2009
Cash management or Treasury management is a marketing term for certain services offered primarily to larger business customers. It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and automated clearing house facilities. Sometimes, private banking customers are given cash management services.
Cash management services generally offered
The following is a list of services generally offered by banks and utilised by larger businesses and corporations:
Account Reconcilement Services:
Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay.
Advanced Web Services:
Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site.
Armored Car Services:
Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash.
Automated Clearing House:
services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise.
Balance Reporting Services:
Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.
Cash Concentration Services:
Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account.
Lockbox services:
Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service.
Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud.
Sweep accounts:
are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds.
Zero Balance Accounting:
can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently.
Wire Transfer:
A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call.
Controlled Disbursement:
This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.
In the past, other services have been offered the usefulness of which has diminished with the rise of the Internet. For example, companies could have daily faxes of their most recent transactions or be sent CD-ROMs of images of their cashed checks. Cash management services can be costly but usually the cost to a company is outweighed by the benefits: cost savings, accuracy, efficiencies, etc.
Cash management services generally offered
The following is a list of services generally offered by banks and utilised by larger businesses and corporations:
Account Reconcilement Services:
Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay.
Advanced Web Services:
Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site.
Armored Car Services:
Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash.
Automated Clearing House:
services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise.
Balance Reporting Services:
Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.
Cash Concentration Services:
Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account.
Lockbox services:
Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service.
Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud.
Sweep accounts:
are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds.
Zero Balance Accounting:
can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently.
Wire Transfer:
A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call.
Controlled Disbursement:
This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.
In the past, other services have been offered the usefulness of which has diminished with the rise of the Internet. For example, companies could have daily faxes of their most recent transactions or be sent CD-ROMs of images of their cashed checks. Cash management services can be costly but usually the cost to a company is outweighed by the benefits: cost savings, accuracy, efficiencies, etc.
Labels: Cash Management, Treasury
posted @ 2:12 PM,
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Money Market, Forex and General News 04-08-09
Wednesday, August 5, 2009
MONEY MARKET
Money Market opened at 12.50 percent.SBP injected Rs 23.5 billion @ 12.53 percent for four days through Open Market Operation OMO).Market topped at 13.75 percent and closed at 12 percent.
FOREX
Inter bank opened at 83.35 & 83.40.Market topped at 83.42 while made a bottom at 83.20.Later on rupee gained some ground and closed at 83.28 & 83.30.
GENERAL NEWS
Self power generation seems to be only viable solution for industries and consumers as power crisis continued to paralyze business activities through out the country. Pakistan imported power peneration machineries of over $1.7 billion in FY-09 compared with $1.1 billion last year, exerting further pressure on import bill. Power shortage and pilferage and un announced load shedding forced industrialist and exporters to import power machinery which substantially increased cost of production.
World Bank postponed two key loans regarding National Trade Corridor worth 834 million dollars for a year after the government's lethargic and lackluster attitude towards transport sector investment. Two loans of 634.5 million-dollar National Expressway and 200 million-dollar National Trade Corridor Improvement Plan were under active review with the World Bank during 2007-08, which are gradually falling out of sight as the government is showing no progress in these areas.
Source: NBP Treasury
Money Market opened at 12.50 percent.SBP injected Rs 23.5 billion @ 12.53 percent for four days through Open Market Operation OMO).Market topped at 13.75 percent and closed at 12 percent.
FOREX
Inter bank opened at 83.35 & 83.40.Market topped at 83.42 while made a bottom at 83.20.Later on rupee gained some ground and closed at 83.28 & 83.30.
GENERAL NEWS
Self power generation seems to be only viable solution for industries and consumers as power crisis continued to paralyze business activities through out the country. Pakistan imported power peneration machineries of over $1.7 billion in FY-09 compared with $1.1 billion last year, exerting further pressure on import bill. Power shortage and pilferage and un announced load shedding forced industrialist and exporters to import power machinery which substantially increased cost of production.
World Bank postponed two key loans regarding National Trade Corridor worth 834 million dollars for a year after the government's lethargic and lackluster attitude towards transport sector investment. Two loans of 634.5 million-dollar National Expressway and 200 million-dollar National Trade Corridor Improvement Plan were under active review with the World Bank during 2007-08, which are gradually falling out of sight as the government is showing no progress in these areas.
Source: NBP Treasury
Labels: Economy and Business, Pakistan Economy, Treasury
posted @ 11:32 AM,
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Liquidity Management
Saturday, August 1, 2009
In order to ensure prudent liquidity management by banks, it has been decided that henceforth Advances to Deposits Ratio (ADR) of any bank shall not exceed 70% at any time. For this purpose, the terms “Advances” and “Deposits” are defined as follows:
Advances:
All Loans / Advances (on gross basis) less refinance availed from SBP under Export Refinance and Long Term Financing Facility (LTFF) Schemes and lending to other banks.
Deposits:
All types of deposits including Demand, Savings, and Time Deposits less deposits / placements from other banks.
Advances:
All Loans / Advances (on gross basis) less refinance availed from SBP under Export Refinance and Long Term Financing Facility (LTFF) Schemes and lending to other banks.
Deposits:
All types of deposits including Demand, Savings, and Time Deposits less deposits / placements from other banks.
posted @ 10:58 AM,
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CRR and SLR
Wednesday, July 22, 2009
CRR is Cash Reserve Requirement - need to be placed with SBP @ 5% of Demand & Time Liabilities (for both PKR and FCY).
SLR is Statutory Liquidity Reserve - required to be invested into SBP's prescribed securities (generally Govt. Securities) @19% of Demand & Time Liabilities. This is applicable for PKR only, as for FCY, is is 15% and is required to be placed with the SBP.
However, banks are not required to keep above 'PKR' related requirements against Demand & Time Liabilities with 'original maturity of 1 year and above.
SLR is Statutory Liquidity Reserve - required to be invested into SBP's prescribed securities (generally Govt. Securities) @19% of Demand & Time Liabilities. This is applicable for PKR only, as for FCY, is is 15% and is required to be placed with the SBP.
However, banks are not required to keep above 'PKR' related requirements against Demand & Time Liabilities with 'original maturity of 1 year and above.
posted @ 11:42 AM,
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Online Certificate of Deposit Rates
People are confronted with sever economic crisis these days. Purchasing power is getting worse day by day. Normally people are used to spend what they earned. However, after experiencing the outcomes of present economic turmoil, they started to think about saving for bad time. Where they should invest their money? It is a big question mark. There are number of companies emerged in the market which are offering returns on the investments. However, I personally found MonitorBankRates.Com and Cdars.Com the best among all.
Have a look at neatly laid out site and see what they are offering and how. This is one of the best sources of getting CD Rates on the internet. They offer a number of certificates of deposits including American Express CD rates, Capital Federal Bank CD rates, Mutual Bank CD rates, wilshire State Bank CD rates, Ally Bank CD rates, Melrose Cooperative Bank CD rates and many more.
Visit the aptly named site and see how Certificate of Deposit Account Registry Services are better for individuals. This is one of the most convenient ways to enjoy the access of full deposit account related services. I personally suggest to see how actually they work and what they are offering for brokerage clients as well.
Have a look at neatly laid out site and see what they are offering and how. This is one of the best sources of getting CD Rates on the internet. They offer a number of certificates of deposits including American Express CD rates, Capital Federal Bank CD rates, Mutual Bank CD rates, wilshire State Bank CD rates, Ally Bank CD rates, Melrose Cooperative Bank CD rates and many more.
Visit the aptly named site and see how Certificate of Deposit Account Registry Services are better for individuals. This is one of the most convenient ways to enjoy the access of full deposit account related services. I personally suggest to see how actually they work and what they are offering for brokerage clients as well.
posted @ 9:43 AM,
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Future Outlook of Pakistan Economy
Monday, June 15, 2009
- The trade deficit is rising and has surpassed $14 billion mark and country is most likely to miss export target of $22 billion in fiscal year 2009 owing to slow growth in exports amid global recession. Though, due to falling Imports, trade deficit might stay below last year’s $20 billion if current trend continues.
- First ten months of current fiscal year have been challenging for the economy due to volatility in domestic and international market.
- Pakistan still needs to build its foreign exchange reserves internally to stabilize rupee against foreign currencies. The rising foreign debt is also a matter of concern as debt servicing puts additional pressure on the local currency.
- Interest rates in Pakistan have been kept high to contain inflation and to attract foreign investment but both objectives haven’t been achieved so far and in turn they have raised the cost of production for industries.
- SBP responded the matter by slashing Discount Rate by 100 basis points in April but still there is a strong anticipation about further rate cut in up coming monetary policy statement from Central Bank by the end of mid July.
- We expect a rate cut of 200 to 300 basis points in July’s MPS. Although given the fact that POL prices may have hit the bottom and may rebound in months to come.
- It would be difficult to keep CPI down and maintain the interest rates at relatively low rates.
- The key indicator would be Net Foreign Assets (NFA). If NFA rises due to such inflows that can help the NDA than interest rate would be maintained at relatively lower levels otherwise rates may have to be jacked up again.
- On the FX front we maintain our view that the parity would depreciate at interest rate differential although the timing is difficult to predict.
Source: National Bank of Pakistan, Treasury
Labels: Economy and Business, Pakistan Economy, Treasury
posted @ 11:59 PM,
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Foreign Exchange Exposure Limit
Thursday, June 11, 2009
State Bank of Pakistan has issued a circlular regards Foreign Exchange Exposure Limit mentioning following:
- Aggregate Foreign Exchange Exposure Limit (FEEL) of Authorised Dealers (ADs) was set as 15% of their Paid-up Capital with a maximum cap of PKR 1,500 million.
- To adjust the FEEL of ADs according to the changed market conditions & trade volumes, it has been decided that, effective from June 15th, 2009, the FEEL of ADs would now be calculated as 20% of their Paid-up Capital (free of losses) with a maximum cap of PKR 2,000 million.
- However, SBP reserves the right to assign the FEEL of any AD below 20% of Paid-up capital (free of losses), based on the trends observed in the utilization of FEEL.
- The FEEL of ADs would now be reviewed annually on the basis of annual audited accounts each year and any changes will be advised to each AD individually through separate letter.
- In the case of banks incorporated in Pakistan the limit would cover all the branches including overseas branches if any, as already advised vide FSCD Circular No 06 referenced above.
- The assigned FEEL should be meticulously adhered to and any breaches would attract penal actions,as deemed appropriate.
posted @ 4:20 PM,
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Foreign Exchange Risk
Query from Emad Khan
We are importing goods from China. My understanding is that at the moment there is no hedging method available in Pakistan. I heard that we can hedge the risk by entering into forward cover in Dubai through our branch office. We will make payment directly to China in our supplier bank account but relevant hedging instrument covers our risk. The branch will transfer the loss or gain on close out to HO in Pakistan.
Is it true? If yes then whats the methodology of the above and how can we do it.
Comment:
The only source of hedging such exchange rate risk is forward booking at some premium. Right now in Pakistan, State Bank of Pakistan has restricted the forward booking against imports as most of the companies are intentially used this facility fruadulently.
However, If a company has presence in middle east or some other foreign country then It can be entered in forward booking transaction through any bank in Pakistan which has presence in middle east or outside the country through showing Letter of Credit of imported supplies.
Labels: Treasury
posted @ 10:37 AM,
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Parri Passu Charge
Wednesday, May 6, 2009
Query from Shoaib Ashar:
What is meant by Parri Passu Charge?
Comment:
Parri Passu is derived from Latin for 'with equal progress'. The phrase is used to indicate simultaneous and equal change or to describe similar ranking of securities or lenders; for example, when a new issue of shares is made, they could be said to rank pari passu, ie, equally with existing shares for the purposes of dividend payments. A common agreement between joint lenders is a pari passu clause under which, in the event of a shortfall, they agree to share equally whatever is available.
The use of "Pari Passu" when creating a charge means that when company Y goes into dissolution, the assets over which the charge has been created will be distributed in proportion to the creditors' respective holdings. Therefore, if the Bank X has tendered a loan facility of 60 million PKR while another creditor, say Z, has tendered 40 million PKR, the recovery after selling assets of Company Y to which joint pari passu charge attached, shall be ditributed in the ratio of 6:4 amongst X and Z. Where preferential rights attach to assets of the company, the preferential creditors rank higher in the distribution stakes i.e. they are paid in priority to other creditors of the company
The use of "Pari Passu" when creating a charge means that when company Y goes into dissolution, the assets over which the charge has been created will be distributed in proportion to the creditors' respective holdings. Therefore, if the Bank X has tendered a loan facility of 60 million PKR while another creditor, say Z, has tendered 40 million PKR, the recovery after selling assets of Company Y to which joint pari passu charge attached, shall be ditributed in the ratio of 6:4 amongst X and Z. Where preferential rights attach to assets of the company, the preferential creditors rank higher in the distribution stakes i.e. they are paid in priority to other creditors of the company
posted @ 12:21 PM,
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Highlights of Monetary Policy April-June 2009
Friday, April 24, 2009
State Bank of Pakistan (SBP) announced Monetary Policy Statement (MPS) on 20th April 2009 and slashed discount rate by 100 basis points to 14.00%. - Government‘s fiscal deficit in the first half of current fiscal year reached to Rs.261 billion and government is determined to achieve full year target of Rs 562 billion.
- Tax collection in first nine months reached to Rs 810 billion and in order to meet fiscal year target of Rs 1300 billion, FBR needs to collect Rs 490 billion in next three months.
- Credit to private sector has been slowed significantly during last nine months owing to sluggish demand from corporates and reluctance of commercial banks to lend due to rising level of Non Performing Loans (NPLs). Net credit to private sector fell drastically to Rs 57 billion in July-March 09 period as compare to last year’s Rs 368 billion.
- Credit to manufacturing sector fell by over hundred billion to to Rs 89.4 billion in July-March period as compare to last year’s Rs 193 billion.
- NPLs heightened to Rs 313.7 billion on December 2008 as compare to Rs 241 billion on June 2008. The major nuisances were consumer finance and textile sector and ratio of NPL to advances in textile sector reached to 15%.Since textile sector’s share in total advances was 20%, it hurt banks badly.
- Fall in Working Capital demand was seen and corporates retired some Rs 47 billion in July-March period. This fall was some how sustained by Fixed Investment which reached to Rs 152 billion in first nine months of fiscal year 08- 09 as compare to last year’s Rs 38 billion. Fixed investments were mainly constituted by power and fertilizer sectors which have entered into certain expansion programs.
- Government retired Rs 170 billion to SBP in March end which was mainly financed through Word Bank’s $500 million, deposit from Bank of China worth $500 million and advance tax collection from corporates.
posted @ 10:06 AM,
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History of Discount Rate
Tuesday, April 21, 2009
Discount Rate is a rate at which State Bank of Pakistan advances loans to commercial banks for three to five days to cover up the liquidity pressure. People are of the opinion that decision of SBP to cut down the discount rate with 100 bps to 14% is wise while observing downward trent of inflation. Lets hope for the best. Brief history of the discount rate is as follows;
- 15-Jan-56 @ 3.00 %
- 15-Jan-59 @ 4.00 %
- 15-Jun-65 @ 5.00 %
- 12-May-72 @ 6.00 %
- 16-Aug-73 @ 8.00%
- 3-Sep-74 @ 9.00 %
- 7-Jun-77 @ 10.00%
- 10-Oct-91 @ 13.00 %
- 10-Jun-92 @ 14.00 %
- 6-Dec-92 @ 15.00%
- 16-Aug-93 @ 17.00 %
- 1-Mar-94 @15.00 %
- 29-Oct-95 @ 16.50 %
- 13-Dec-95 @ 17.00 %
- 13-Nov-96 @ 20.00 %
- 17-Jun-97 @ 19.00 %
- 28-Jul-97 @ 18.50 %
- 29-Oct-97 @ 18.00 %
- 1-Jul-98 @ 16.50 %
- 4-Mar-99 @ 15.50 %
- 3-Apr-99 @ 14.00 %
- 19-May-99 @ 13.00 %
- 5-Jan-00 @ 11.00 %
- 19-Sep-00 @ 12.00 %
- 5-Oct-00 @ 13.00 %
- 7-Jun-01 @ 14.00 %
- 19-Jul-01 @ 13.00 %
- 17-Aug-01 @ 12.00 %
- 22-Oct-01 @ 10.00 %
- 23-Jan-02 @ 9.00 %
- 18-Nov-02 @ 7.50 %
- 11-Apr-05 @ 9.00 %
- 31-Jul-06 @ 9.50 %
- 1-Aug-07 @ 10.00 %
- 31-Jan-08 @ 10.50 %
- 22-May-08 @ 12.00 %
- 29-Jul-08 @ 13.00 %
- 12-Nov-08 @ 15.00 %
- 21-Apr-09 @ 14.00 %
posted @ 11:46 AM,
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Process of availing Murabaha Finance
Thursday, April 2, 2009
Query from maria qurashi:What is the process of obtaining Murabaha Finance from Islamic Bank?
Comment:
Following process flow has been developed for purchase of raw materials including Cotton, Yarn, Polyester Fiber, and Viscose:
- After necessary Credit and Shariah approvals, Bank and Client will enter into Master Murabaha Fianance Agreement and Agency Agreement listing the assets to be procured.
- The Relationship Manager and/or Bank Officer will educate the customer about the Murabaha process and especially about the importance of placing Order form before / along with placing order to supplier, signing of the declaration before consumption and storing the purchased stock of goods separately from the stock already present in the warehouse for proper identification.
- As an agent, the customer will negotiate the price of the products and finalize details with the seller and subsequently send an Order Form to Bank before / along with placing Order to supplier.
- The terms of trade for purchases are on Spot basis and on Credit as well.
- In case of Spot Purchases, as per order form funds will be disbursed into Client account at Bank for onward Direct Payment to suppliers through Bank Cross Cheques / DD / PO or make Indirect Payment through other banks Cheque/DD/PO/Online Slip within 05 working days of disbursement. Customer will provide copy of payment instrument used as payment evidence to Bank.
- In case of Credit Purchases, Client as Agent of Bank will place the purchase order to its Suppliers and will inform Baank through written request elaborating the terms of Credit i.e. expected time period of Cash Outflows (Maximum Credit period of 40 days) along with amount.
- As per above Credit terms, on or before 40th day, Bank upon request of Client will make disbursement in their account for onward payment to the Supplier through Bank or other bank(s) as mentioned above.
- Upon arrival of goods customer will provide purchase evidence in the shape of Truck Receipts / Inventory Report / Stock Report / Gate Passes to Bank and give and offer to Bank to purchase the goods via declaration immediately (but not later than 10 working days after receipt of Cotton & Yarn and not later than 3 days for other goods). It must be ensured by the customer that the goods are not consumed before the declaration Moreover, customer confirmation regarding purchase price and weight on above referred Purchase Evidences carrying sign & stamp will be sufficient to calculate the declaration amount. Customer will provide Purchase Invoices for at-least 20% of disbursed amount for each sub-Murabaha transaction.
- To ensure that goods etc. are not consumed before signing of declaration, the related Relationship Officer / Relationship Manager will also perform random physical inspections of purchased stock in 10% of the Sub-Murabaha transactions. Telephonic confirmation shall be taken in all the remaining cases.
- Upon confirmation Bank will accept the offer by signing the Declaration and the ownership of assets will transfer. At this stage the tenor of sub-Murabaha, contact price and payment schedule will be finalized through Summary Payment Schedule.
- Upon maturity date the Sub Murabaha will be settled by Client from its own sources.
- For credit purchases profit rate at the day of Declaration will be used to calculate the Contact Price.
posted @ 2:13 PM,
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Nostro and Vostro Account
Friday, March 27, 2009
Literal meaning of Nostro and Vostro is “ours and yours”. Speaking from the bank's point-of-view: A nostro is our account of our money, held by you and vostro is our account of your money, held by us.Nostro Account:
is a foreign currency current account maintained with another bank. The account is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident.Vostro Account: is a local currency account maintained by a local bank for a foreign (correspondent) bank. For the foreign bank it is a nostro account.
For example:
National Bank does some transactions (loans, foreign exchange, etc.) in US$, but banks in Pakistan will only handle payments in Pak Rs. So NBP opens a US$ account at foreign bank Citibank New York, USA, and instructs all counter-parties to settle transactions in US$ at "account no.123456 in name of NBP, at Citibank New York, USA. NBP maintains its own records of that account, for reconciliation; this is its nostro account. Citibank New York, USA record of the same account is the vostro account.Labels: Treasury
posted @ 9:54 AM,
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Foreign Currency Hedging
Tuesday, March 24, 2009
Query from abid younas:
"If a company imports products through open account method (without having a letter of credit) or through contructual imports. What are the hedging instruments available to the company for foreign currency transactions since all of you are aware about exchange rate fluctuations in our country."
Comment:
Since SBP has temporarily restricted the farward booking of imports so that company has to pay at the spot rate prevailing at the time of getting documents and has to carry the risk of exchange rate fluctuation.
However, in normal circumstances Forward Rate Booking and Currency Swap Transaction would be avaialbe to hedge the imports without carrying the risk of exchange rate fluctuation.
Labels: accounting, Treasury
posted @ 1:46 PM,
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Difference between Discount Rate and Interest Rate
Saturday, March 21, 2009
Discount Rate means the minimum rate of return to be paid by recipient of financing facilities from state bank of Pakistan for meeting temporary liquidity shortage. These days discount rate has been increased upto 15 % p.a. (Source: BPRD Circular # 14 of 2008). In simple words it is the rate that is used to discount the bill or receivalbe of the party.
Whereas Interest Rate means A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve Policies. These days local currency financing (lease or short/long term) cost KIBOR + 2.50 bps to 5.00 bps.
Normally the term used for lease and borrowing is interest rate rather than discount rate.
Labels: accounting, Treasury
posted @ 10:25 AM,
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Basel II - An Introduction
Tuesday, January 20, 2009
Background:Capital requirements rules state that credit institutions, like banks and building societies, must at all times maintain a minimum amount of financial capital, in order to cover the risks to which they are exposed. The aim is
- to ensure the financial soundness of such institutions,
- to maintain customer confidence in the solvency of the institutions,
- to ensure the stability of the financial system at large, and
- to protect depositors against losses.
The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
Such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse
Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and
The Basel II framework consists of three 'pillars':
- Pillar 1 sets out the minimum capital requirements firms will be required to meet to cover credit, market and operational risk.
- The rules under Pillar 2 create a new supervisory review process. This requires financial institutions to have their own internal processes to assess their capital needs and appoint supervisors to evaluate an institutions’ overall risk profile, to ensure that they hold adequate capital.
- The aim of Pillar 3 is to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management.
The Committee listed a number of operational risk events which were identified (with co-operation from the industry) as having the potential to result in substantial losses:
Internal fraud – for example, intentional misreporting of positions, employee theft, and insider trading on an employee’s own account.
- External fraud – for example, robbery, forgery, cheque kiting, and damage from computer hacking.
- Employment practices and workplace safety – for example, workers compensation claims, violation of employee health and safety rules, organised labour activities and discrimination claims.
- Clients, products and business practices – for example, misuse of confidential customer information, improper trading activities on the bank’s account, money laundering, and sale of unauthorised products.
- Damage to physical assets – for example, terrorism, vandalism, earthquakes, fires and floods.
- Business disruption and system failures – for example, hardware and software failures, telecommunication problems, and power failures.
- Execution, delivery and process management – for example, data entry errors, incomplete legal documentation and unapproved access given to client accounts.
Three approaches for calculating capital adequacy
In calculating operational risk capital charges, Basel II set out three different methods which may be adopted:
- The Basic Indicator Approach
- The Standardised Approach
- The Advanced Measurement Approach
The Basic Indicator Approach is the simplest of the three approaches, and will be the default option for most firms. It applies a relatively straightforward calculation based on the firms' income to determine its capital requirements.
The Standardised Approach again relies on calculations based on income, but with different percentages applying across different business lines. To be able to take advantage of the Standardised Approach firms will have to meet certain qualifying criteria.
The Advanced Measurement Approach is the most complicated of the three options. Under this approach, each firm calculates it own capital requirements, by developing and applying its own internal risk measurement system.
Labels: Treasury
posted @ 3:30 PM,
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