Interbank and Open Market Rates Edge Closer to IMF’s Target

Introduction

The rupee rebounded in the open market on Wednesday as a crackdown on the informal currency market started to help the gap between the interbank and open-market rates edge closer to the International Monetary Fund’s (IMF) target of 1.25 per cent.

State Bank of Pakistan’s Reforms

The State Bank of Pakistan (SBP) has introduced structural reforms for exchange firms, raising the minimum capital requirement to Rs500m from Rs200m. Additionally, the SBP has ordered banks to set up separate entities to conduct forex transactions.

Impact on Currency Rates

The rupee catapulted to 312 to the dollar in the open market on Wednesday from 323 a day ago. However, the local currency gained little in the interbank market, rising by 12 paise to close at 306.98. Nevertheless, the dollar-rate gap between the two markets has now shrunk to 1.6pc.

Expert Opinion

• Malik Bostan, president of the Forex Association of Pakistan, said that following the crackdown, illicit currency dealers are now in the shadows. The open market has stabilised, even though trading volumes have diminished.
• Samiullah Tariq, head of research and development at Pakistan Kuwait Investment Company, stated that the sharp decline in the dollar’s value in the market is good for the exchange rate. The differential has come down to 1.6pc, which will help the country to meet the IMF condition.

Key Reforms by SBP

• The SBP has decided to introduce structural reforms in the exchange companies’ sector to provide better services to the general public and bring transparency and competitiveness.
• Banks engaged in foreign exchange operations are required to set up separate entities for these transactions.
• Existing exchange companies and their franchisees would have to be consolidated and transformed into a single category of exchange companies with a well-defined mandate.
• The paid-up capital of exchange companies has been enhanced to Rs500 million from Rs200m.
• B-category exchange companies with a paid-up capital of Rs25m are banned.

Transition Process for Exchange Companies

The SBP outlined a transition process for exchange companies, their franchises, and Category B exchange companies to become mainstream exchange firms. Category B firms may graduate to exchange companies after meeting all regulatory requirements within three months; otherwise, their license would be cancelled. Franchisees of exchange companies may either merge or sell operations to the concerned franchiser company within three months after meeting all regulatory requirements. Category B exchange companies and franchises of exchange firms would need to submit their conversion plan and seek a no-objection certificate (NOC) from the SBP within a month.

Published in Dawn, September 7th, 2023