Forex firms record slowdown as dollar supply shrinks

KARACHI: Pakistan’s key foreign currency exchange firms recorded more than 35 percent drop in their transactions during the past four months as they were facing shortage in dollars to meet the demand, reflecting in the ever-fragile rupee in the open market.   

Sale and purchase of dollars, inward/outward remittances and foreign currency exports fell to $31.1 million in November from $52.7 million in August, showed the data compiled by the Exchange Companies Association of Pakistan (ECAP). The transactions were recorded by half (A category) of the total 52 foreign exchange companies operating in the country.

Zafar Paracha, secretary general of ECAP said money changers are facing dearth of dollars or tight supplies, “as a traditional source of hard currency, foreign remittances, dried up.”

“The inflows of pound sterling and euro declined as their depreciation across the global markets discouraged overseas Pakistanis to send remittances in these currencies,” Paracha said. 

In Pakistan, banks already handle majority of the foreign exchange transactions in the country, while money changers have only 20 percent market share.

In June, the State Bank of Pakistan (SBP) issued new regulations for the exchange companies. 

“Exchange companies are allowed to export all foreign currencies other than US dollar. Prior approval from State Bank is mandatory before starting the foreign currency export business,” the SBP’s manual said.  “All exchange companies shall ensure that a minimum of 10 percent US dollars received against export of foreign currencies will be sold in interbank on an ongoing basis.”

The foreign exchange companies are also bound to take the central bank’s approval for all outward remittance transactions of $50,000 or above (or equivalent in other currencies).

Currency dealers said the firms are not privileged to take dollars from banks to meet their demand.  

Analyst said exchange companies – especially from ‘B’ category – face more stringent regulations imposed by the central bank to check money laundering and terrorist financing.                                                                                                

Dollar supplies with the money changers are not sufficient to meet the currency needs of the customers.

“We used to have hard currency up to $300 million in surplus. Now, it has slid to $150 million,” said Malik Bostan, president of Forex Association of Pakistan.

Analysts said slowdown in foreign inflows and currency smuggling caused shortage of dollars in the open market, widening the spread between interbank and kerb market rates. 

The ECAP quoted rupee in the range of 107.70 and 108 per dollar on Friday in kerb dealings, while in the interbank market the rupee traded at 104.84.

Pak rupee, which was stable at the support level of 106 against the dollar over the past 15 months, quickly crossed the 109 mark in the open market during the last week of November. 

Paracha said the transactions dropped 18 percent month-on-month in November alone.

SBP spokesman Abid Qamar said weakening of the local unit in the open market was beyond economic fundamentals.  

“The law enforcement agencies are taking actions against currency and gold movements at airport and the central bank has strong vigilance on exchange companies regarding illegal payments and transfers in their books,” Qamar said.

Industry observers said people go to illegal market to get rid of the central bank’s tough regulations.   

“Around 20, 000 people are associated with the illegal business of foreign exchange in Peshawar and Lahore,” Paracha said. 

“The government must continue to fight against currency and gold smugglers and non-compliant money changers to control illicit trade in dollars and to maintain the rupee’s value in open market.”