New forex rules

SBP to improve regulation of currency exchanges, other forex-related businesses; it is only about 25 years too late

The State Bank of Pakistan’s plans to improve regulation of currency exchanges and other forex-related businesses is a welcome development, and only about 25 years too late. The last time Pakistan faced a currency crisis of similar magnitude was arguably after the nuclear tests in 1998, when hard restrictions were imposed on currency prices and trading, but widely flouted through the use of illegal secondary channels.

Not enough was done to address the root causes of the problem, and the crisis only ended due to Pakistan becoming a frontline state in the War on Terror and the ensuing free flow of dollars, which allowed successive governments and the State Bank to mostly ignore the problem for several years. Even in the years of responding to FATF greylisting, these reforms were ignored because, though economically necessary, they were not among the listed requirements. The new push comes, perhaps coincidentally, after Army Chief Asim Munir reassured business leaders that something would be done. One of the prompting factors has been the wide gap between the bank and open market rates, which encourages grey and black market operations. However, it is entirely possible that currency speculators intentionally created the gap to profit from grey market trade.

The biggest reforms are a significant increase in the minimum capital requirement to operate an exchange company — rising from Rs200 million to Rs500 million — and the requirement for banks to establish or acquire exchange companies. Although this could lead to anti-consumer consolidation, strong regulation would make banks and exchanges more cautious of bending the rules, since they would have more to lose. There have also been some reports of harsher restrictions to address currency hoarding, such as only allowing forex to be held in banks, with cash only being released to those traveling abroad. Unfortunately, clarity is still needed on how the government plans to curb smuggling to and from Iran and Afghanistan, which not only causes tax revenue losses, but also relies on dollars.

Published in The Express Tribune, September 9^th, 2023.

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