PRESSURE on the exchange rate persists and is unlikely to go anytime soon because the current account imbalance is still too wide (ie $6.43 billion in the first five months of this fiscal year) to be bridged shortly.

And a growing mistrust in the US and Pakistan’s relationship can only add to external-sector worries. Whether, how soon and at what cost this mistrust will go will understandably affect all future external-sector projections.

Practically speaking, these two factors will continue to weigh on policymaking and policy revisions in the arena of foreign exchange management.

Besides, managing the forex regime now requires stricter measures against those involved in dollar hoarding, capital flight and exchange-rate speculation. This is aimed at avoiding volatility at a time when the rupee has already been depreciated and maintaining a reasonable dollar-rupee rate band is necessary, sources in the State Bank of Pakistan (SBP) say.

It is against this backdrop that the SBP has decided that exchange companies can now bring in US dollars in cash against sales of other foreign currencies in Dubai equal to a maximum of 35 per cent of such sales. Obviously the purpose is to encourage them to transfer the remaining 65pc of the sale proceeds back home through banks.

The SBP has taken action against erring exchange companies on misconduct charges, including misreporting, facilitating currency smuggling and capital flight

The SBP’s move is expected to help increase dollar liquidity in the interbank market and help ease the pressure on the exchange rate to some extent. In less than a month, the rupee has lost 4.7pc value against the US dollar in the interbank market, coming down to Rs110.51 a dollar on Jan 4 from 105.54 on Dec 7.

Quite expectedly, forex companies are not happy with this decision. Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan (ECAP), terms it a surprising move that will hurt the market mechanism.

SBP sources, however, say that when exchange companies were allowed to bring back cash dollars from Dubai up to 100pc of the sales of non-dollar foreign currencies (euro, pound sterling, Saudi riyal and UAE dirham), cases of misdeclaration were detected repeatedly.

In a number of cases, the amounts of foreign currencies officially transported to Dubai were found to be far larger than declared at the airports in an attempt to bring back home more cash dollars than officially traceable. Unscrupulous elements in exchange companies used to do this to make off-record sales of dollars to the big and the powerful in Pakistan.

“The possibility of misuse of dollars thus coming into circulation in anti-state activities cannot be ruled out,” said a source close to Federal Investigation Agency (FIA).

Under an agreement with the central bank, FIA keeps a close liaison with SBP on monitoring of foreign currency movements to and from Pakistan and the two institutions have lately succeeded in containing foreign currency smuggling and capital flight under different guises.

The central bank has also taken action against erring exchange companies on a variety of misconduct charges, including misreporting, facilitating currency smuggling and flight of capital, etc.

Sources in the SBP recall that before July 2015, exchange companies were required to repatriate (through their bank accounts) the dollar equivalent of hard foreign currencies taken out of the country and sold in Dubai.

But by the end of July that year, the central bank allowed them to bring back such dollar equivalent on their own. One purpose was to ensure enough dollar supply in the open market in Pakistan to ward off undue pressure on open-market exchange rates.

Another purpose was to enable these companies to meet the dollar requirement on their own, so that at times of increased dollar buying in the open market banks would not have to sell dollars to them, on the advice of SBP, to keep the open-market dollar rate from shooting up and creating an undesirable gap between the interbank and open market rates.

“So, if the exchange companies have now been restricted to bring cash dollars from Dubai only up to 30pc of the sale of other hard currencies from that country, they should not be bothered about it,” commented the head of a forex company, adding that exchange companies with cleaner track record of regulatory compliance should not have any issue with it.

The above-discussed restriction is one of the many that have been enforced in the open market forex regime in recent months, sources in SBP say, adding that the chief objective was to introduce greater discipline in the open market where any loophole in the system is prone to be misused by speculators.

Back in July last year, the SBP directed all exchange companies to begin online reporting of comprehensive data regarding their daily operations on a format that required more minute detail. They were also required to submit summaries of such details containing critical breakdown of the sources of inflow and outflow of dollars.

That move made it possible for the SBP to find informational gaps big enough to suspect misconduct on part of an exchange company.

A source close to the SBP told this writer that discrepancies were spotted mostly in transaction adjustment of branches of exchange companies and in remittances against advance receipts — two sub-components of the sources of outflow of foreign exchange.

He said that those responsible for monitoring exchange companies’ business also noticed irregularities in outward remittances of funds regarding overseas travels of different kinds, including business and religious travel.

Published in Dawn, The Business and Finance Weekly, January 8th,2018