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Earlier this week, banks presidents had a meeting with finance minister, governor SBP, and a senior officer of an intelligence agency. The gist of the meeting was to push banks to open exchange companies of their own. And it is fast happening, as almost all major commercial banks are in the process of doing so.

The idea is to move the retail-based foreign exchange transactions towards banks. Authorities in Pindi and Islamabad want banks to take a front role in managing currency demand in the retail market for better transparency and trackability. That is how it should be. However, when the buyer is using tax evaded (or other form of undocumented) money for buying or selling foreign currency, he would shy away from banks.

As a result, commercial banks will need to open more foreign currency accounts, as that will make it easier for documented players to transact in foreign currency. Here, banks demanded simplification of the KYC requirement. However, some banks think that the KYC is already simple, it is just that some players are too lazy to understand the business opportunity and venture into it.

Today, resident FE-25 accounts balance stands at $5.7 billion. In 1999, it used to be higher than $10 billion. However, after the freezing of accounts, the figure never crossed $10 billion again. During the meeting, one participant commented that $8-9 billion foreign currency is in banks and private lockers within the country. The idea is to bring it into the system so that it can be used for international trade financing and other forward/swapping needs.

Here there are two issues. One is about the dealers working in Hundi hawala business. And the other is hedging the informal Pak Rupee savings in dollars. In curbing hundi/hawala business, the first step is to crack down on smuggling and under-invoicing. Then there is regular and persistent demand for gold which is imported and sold almost completely out of the books. Here, powers-that-be hope to bring the wealth into the formal banking channel. It’s easier said than done.

Then the issue of high currency in circulation (CiC) was raised as well. Banks made suggestions to the effect of demonetization (ban) of Rs5,000 note. However, the authorities do not like the idea. They are of the view that this could create panic and cite poor experience of India.

In addition, banks raised the issue of distinction of non-filers which hinders banks from bringing cash economy into the system. On this everyone in the room agreed that there should be no concept of non-filer, and everyone should file a tax return. This leads to the idea of syncing Nadra, FBR and utility companies’ data in banking credit information bureau (CIB) to treat all defaulters with one eye. The main stakeholder SBP was silent on that part of the conversation.

There were a few other points discussed in the meeting as well. But the gist was to give banks a higher role in retail foreign currency transactions and to bring stability to the PKR. There is a realization about the limited efficacy of crackdown on the currency. Ultimately, demand and supply in the interbank market and overall macroeconomic landscape will determine the currency value.

Nonetheless, crackdown and scrutiny of informal players must not allow panic to spread in the market. Authorities are instilling fear amongst undeclared and undocumented foreign currency holders. The expectation is that more people would come to sell or enter documentation. This, coupled with banks’ increased focus on the forex retail market can keep the open market in check.

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Dabeer Razvi Sep 20, 2023 11:29am
A good step.
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Fazeel Siddiqui (Overseas Pakistani) Sep 20, 2023 02:59pm
Same defacto rulers, the agencies bosses eyeing on private accounts & lockers, for long time opposed all liberal policies of civil govts cowing it dangerous to national security and now they're enforcing themselves. For what, to appear as saviors of the mess themselves created? An example opening FCA's in all banks/ECs, which public demanded for last 15 years. Is there someone who can hold their collars and make them accountable for miserable lives & deaths due to economical & social destruction caused by them past 75 years or this accountability is only for powerless civilian proxies?
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Muhammad Sohail Sep 21, 2023 07:23am
This initiative of FX widow for retailers should have been taken way back but it is never too late. It is a wise call to airtight the loopholes and much better from transparency and controls perspective. It may also work well, if we offer better (exclusive) exchange rates for the general public FX holders to surrender cash dollars to the banks. We should encourage general public/individuals to avoid dollarization, as it is the case since ages despite freezing dollar accounts in 1999. At the same time, we should relax existing regulations for general public to buy dollars for their private purposes to easily access and buy dollars from banks driven exchange windows. Regulators to strongly curb hundi/hawala, under/over invoicing at import side, so to avoid malpractices, which ultimately create pressure on FX and hence an inappropriate FX rates created between kerb marking and interbank.
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Ghareeb Awam Sep 21, 2023 08:14am
'...and a senior officer of an intelligence agency...' but why? For God's sake, stop this nonsense. We are already a laughing stock for the international community. And these banks, now opening exchange companies are the same, which remained involved in money-laundering and terror-funding in the past. Their senior managements earn millions a month in perks and privileges while the common man is finding it impossible to make his both ends meet. Make richer the rich, poorer the poor.
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wanker Sep 24, 2023 12:17am
Retail market is too small for banks. They will struggle to earn a profit.
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