Foreign currency exchange companies - which mostly trade currencies with individuals on physical counters in the open market - are estimated to have supplied a total of $4 billion to the interbank market for the second successive fiscal year.
The increased supply to the mainstream interbank market has helped stabilise the country’s foreign currency reserves and has extended the much-needed support to strengthening the Pakistani rupee against the US dollar and other major foreign currencies over two years - FY20 and FY21.
“In the past few years, the companies used to supply $1.5-2 billion a year (which was around half or less than the supply in the last two years),” Exchange Companies Association of Pakistan (ECAP) President Malik Bostan said while talking to The Express Tribune.
The companies have managed to sell higher volumes of foreign currencies in the interbank market in the wake of a significant drop in demand for foreign currencies from individuals on the physical counters.
The latest appreciation of the rupee against the greenback is one of the prime reasons behind the drop in demand. The rupee appreciation has forced individuals to stop investing in foreign currencies.
Besides, the demand has dropped due to a notable decrease in international travel (including for Hajj and Umrah) following lockdowns imposed globally amid the Covid-19 pandemic.
“A majority of individuals came to sell foreign currencies at our counters for the past two years (FY20 and FY21),” he said, adding that earlier (mainly from December 2017 to June 2019), a majority of them came to buy foreign currencies when the rupee was depreciating against the US dollar.
The exchange companies facilitate Pakistani citizens in receiving foreign currencies (better known as worker remittances) from their relatives abroad.
“We have been surrendering $300-350 million a month in the interbank market in the current fiscal year…and in the preceding year (FY20), totalling around $4 billion in a year,” he said.
The increase in supplies to the exchange companies is mainly attributed to an increase in remittances sent by non-resident Pakistanis through legal channels like exchange companies and banks during the pandemic.
“The disease has destroyed illegal channels like Hundi and Hawala due to full or partial suspension of international travel amid lockdowns,” Bostan said.
Hundi and Hawala operators used to smuggle currencies through international flights.
Besides, the government and the State Bank of Pakistan (SBP) have also increased profit margins of international exchange companies, domestic companies and banks to motivate them to process even small amount of remittances like $100 from abroad to Pakistan under PRI (Pakistan Remittance Initiative).
“People prefer to receive remittances through exchange companies as we process the payments within 5-20 minutes unlike (…) dealers,” the analyst claimed.
To recall, workers’ remittances grew by a strong 43% to an eight-month high at $2.72 billion in March. Cumulatively in the first nine-month (Jul-Mar) of the current fiscal year 2021, the remittances grew 26% to $21.5 billion compared to $17 billion in the same period of the previous fiscal year, according to the central bank.
The country’s foreign currency reserves stood at $ 15.77 billion in the week ended on May 7, the central bank reported on Monday.
The rupee depreciated 0.21% Rs152.60 against the US dollar in the interbank market on Monday. It, however, remained strong compared to its all-time low closing at $168.43 on August 26, 2020.
According to a report published by the State Bank of Paistan in August 2018, the currency dealers in Pakistan’s open market routed foreign currencies close to $8 billion - 2.5% of GDP - in 2017, with the US dollar alone accounting for $3 billion of the total trades.
Individuals consumed close to 63% of the total volume of the currencies exchanged in the year. The exchange companies sold $972 million in the interbank market in FY17, the report highlighted.
Published in The Express Tribune, May 18th, 2021.