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General: The State Bank of Pakistan has issued an EPD Circular Letter No 02 of 2024 dated February 23, 2024. Through this letter ‘Exporters’ have been allowed to use the amounts held in their ‘Exporters’ Special Foreign Currency Account for certain purposes without specific approval of the State Bank of Pakistan. This is a major step for proper deregulation of foreign exchange regime in Pakistan.

What is Exporter Special Foreign Currency Account (ESFCA)?

Under the foreign exchange regulations exporters are allowed to retain a percentage out of their export proceeds in ESFCA. The limits prescribed are:

Export of goods

(a) Books, journals and magazines- Up to 33 1/3%

(b) Pharmaceutical products- Up to 15%

(c) Cement- Up to 5%

(d) Cotton- Up to 2%

(e) All other goods- Up to 10%

Exports of software

Exporters, including freelancers, of all types of legitimate services may retain up to 35% of their net foreign exchange earnings in ESFCA. These may include, inter alia, financial, wholesale and retail distribution, logistics and transportation, storage and communications, telecommunication, information technology (IT) and IT enabled services (ITeS), medical, educational, engineering, real estate development, tourism, technical testing and consultancy services.

Those exporters who post at least 10% growth in their net foreign exchange earnings in terms of US dollar over the last financial year’s export performance may retain up to 50% of their additional export earnings in their ESFCA.

Utilisation of ESFCA

Utilisation of ESFCA is regulated by the provisions of Paragraph 40 of Chapter 12 of the Foreign Exchange Control Manual (FEM). Through the aforementioned Circular Paragraph 40 has been replaced by the Annexure to EPD Circular Letter No. 2 of 2024 dated February 23, 2024 (which is now paragraph 40).

Circular & annexure

The circular is attached as Annexure ‘B’ to this note. Annexure A to the circular states as under:

Annexure-A 40.

Utilisation of funds held in Exporters’ Special Foreign Currency Account i.

(i) Authorised Dealers may allow exporters of goods and services to retain prescribed percentage of their export proceeds in Exporters’ Special Foreign Currency Account (ESFCA), as enunciated in Paras 35 (iii), 36 and 37 of this chapter.

In this regard, the exporters may utilise these funds freely for making all types of payments abroad of current account nature to fulfil the needs of their own businesses, without prior SBP approval, including but not limited to the following:

a. Payment for import by exporters for the purpose of their own business, subject to compliance with applicable Import Policy Order and related laws/regulations issued by any government department and SBP.

b. Shortfall/non-realization of export proceeds due to genuine reasons beyond the control of an exporter, subject to submission of sufficient documentary evidence to the satisfaction of concerned Authorised Dealer. In such cases, the banks shall report overdue to FEOD, SBP BSC in their periodic reporting in Appendix V-20, while the adjusted amount will be reported in the column of “realised amount” of Appendix V-21 (as and when such adjustments are allowed by the banks). In case of misuse of this provision, however, appropriate enforcement action will be taken against the respective AD and/or exporter under relevant provisions of FERA, 1947.

c. Payment for acquisition of services/ IT or digital services from abroad, without prior designation requirement as stipulated in Chapter 14 (Commercial Remittances).

d. Payments for dividends of domestic entities to their shareholders abroad, provided shares owned are registered as ‘Repatriable’ with SBP. e. Operational expenses, including employee salaries, of liaison/ marketing/ representative offices abroad of local companies in accordance with the provisions of Para 13, Chapter 20 of FE Manual.

ii. The funds in ESFCAs can also be used for making payments with regard to capital and financial account transactions, such as equity investment abroad and foreign currency loan repayments. However, in case of remittance of such transactions, proper procedure as described in the relevant regulations shall be followed. For example, for equity investment abroad, instructions stipulated in Para 13, Chapter 20 of the FE Manual shall be adhered to. Similarly, regarding loan repayments, the procedure defined in chapter 19 would be followed.

iii. The Authorised Dealers are required to facilitate the exporters (on specific request) by issuing debit cards against balances held in ESFCAs. However, no cash withdrawal in foreign currency from ESFCAs shall be allowed within Pakistan. State Bank of Pakistan, I.I. Chundrigar Road, Karachi. State Bank of Pakistan State Bank_Pak www.sbp.org.pk Exchange Policy Department

iv. The funds of such exporters available in the ESFCA with an Authorised Dealer may be transferred to the same exporter’s ESFCA maintained with another Authorised Dealer, upon specific request of the exporter. Both of the Authorised Dealers involved shall ensure that the proceeds being credited are from ESFCA and pertain to the same exporter.

v. The funds available in ESFCAs cannot be credited/transferred to any other FCY/ FE-25 account(s). However, on the request of the exporter, the funds available in ESFCA can be converted into PKR at any time.

Utilisation of ESFCA for foreign investment

The major change in the aforesaid paragraph relates to utilisation of ESFCA for:

a. Remittance of dividend on repatriable capital;

b. Acquisition/formation of foreign entities; and

c. Repayment of foreign loans

Dividend remittance

In the past such amounts could not be used for remittance of dividend on shares in the exporting company held by a foreigner through a repatriable investment. Now these amounts can be used for such remittance. This will encourage foreign investment in export-oriented entities.

Foreign investment and repayment of foreign loans

This is a major change. The circular also has right allowed payments as under:

The funds in ESFCAs can also be used for making payments with regard to capital and financial account transactions, such as equity investment abroad and foreign currency loan repayments.

This effectively means that henceforth no intervention of State Bank of Pakistan is required if ESFCA is used for acquisition of any foreign entity by the exporter. There is no requirement to the effect that investment is to be made in similar industry segments etc. The restriction or regulation has only been placed if the funds are used in a manner that tantamounts to ‘Trading of Quoted Shares by Non-Residents’ (Paragraph 13 of Chapter 12 of FEM).

This is a very positive step, as there was lack of clarity in the previous Paragraph 40 of Chapter 12 as to whether or not investment could be made in foreign equity out of ESFCA.

We understand that the State Bank of Pakistan also allows, without any restriction, borrowings outside Pakistan by the exporters equal to the amount held in ESFCA.

Annexure B

EPD Circular Letter No. 02 of 2024

February 23, 2024

The Presidents/Chief Executives

All Authorised Dealers in Foreign Exchange

Dear Sir/Madam,

Utilisation of Funds held in Exporters’ Special Foreign Currency Accounts (ESFCAs)

Attention of Authorised Dealers is invited towards Para 40 of Chapter 12 (Exports) of the Foreign Exchange Manual, which define purposes for utilisation of retained funds in Exporters’ Special Foreign Currency Accounts (ESFCAs).

  1. In order to facilitate the exporters and to promote ease of doing business, the utilisation of the retained funds has been further liberalised. Henceforth, all exporters will be able to freely utilise the funds held in ESFCAs for making all types of payments abroad of current account nature, for their own business purposes, without prior SBP approval. Furthermore, on request of exporters, Authorised Dealers may issue debit cards against the balances held in ESFCAs. Accordingly, Para 40 of Chapter 12 (Exports) has been amended and is attached as Annexure-A.

  2. Authorised Dealers are advised to bring these instructions to the knowledge of all their constituents for meticulous compliance.

Encl: as above

Yours truly,

(Dr. Asif Ali)

Director

Copyright Business Recorder, 2024

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