KARACHI, Jan 16: The State Bank of Pakistan will stop purchases for its foreign exchange needs from the kerb market from July 1, sources here said.

With swelling foreign exchange reserves and stable rupee, the SBP has already been shifting its dollar purchases from the kerb to interbank market.

The buying and selling of forex by the SBP will be restricted to interbank market from July and, these sources revealed, that it would not even buy from the exchange companies which are expected to start operation from next fiscal year.

The sources said that the operational logistics and the draft rules and regulations are being given final touches after that these would be sent to ministry of law and the government for final approval. These include amendments in the company law that would empower the State Bank to regulate and monitor the exchange companies.

Once these regulations are approved, banks and money changers would be invited by the State Bank to apply for licence to run exchange companies. Through these exchange companies, the banks would be buying dollars from the Middle East specially from Dubai.

The State Bank would also allow the banks to purchase from August 1, 2002 foreign exchange from exchange companies at freely negotiated rates. Currency experts see variations in the exchange rates quoted by the exchange companies and at the interbank market. The sources said that the operational logistics for “internal buying” between banks and their exchange companies is also being worked out.

Recently, the State Bank took two major steps to liberalize the foreign exchange regime. It lifted the commercial backing requirement on interbank foreign exchange transactions. Besides, it allowed unlimited access to foreign exchange on the interbank market for all current transactions (including dividends and profit repatriation), beyond the then current bona fide limits, but on the basis of appropriate, clearly specified documentation.

In the letter of intent (LoI) sent to the IMF, the government is committed to maintaining a fully flexible market determined exchange rate. Intervention in the exchange market will be limited to smoothing volatility and to pursuing the targeted build-up of reserves.

The regulatory reforms outlined in the LOI include consolidation of money changers into exchange companies that can be brought under appropriate supervision. The existing exchange manual, which may divert transactions to the kerb market, will be drastically simplified.