Volatility in exchange rates is the lifeline of foreign exchange companies. And more the speed of the fall in the rupee’s value, higher is the growth in their business volumes — and of course, profits.

This isn’t just a popular notion. This is the reality that is reflected in the financial accounts of forex firms. And even a cursory look at their balance sheets brings this point to the fore.

Wider spreads between official and open market exchange rates due to the pressure on the rupee in FY13 and in the first quarter of FY14 have benefited exchange companies a lot.

We’ve seen transactions expanding amazingly, and many of us have made big profits in the last fiscal year and so far during this year,” says an official of the Exchange Companies Association of Pakistan.

Since these companies are not listed and as such are not bound to make their financials public, recent statistics are not available.

The association’s officials, however, guesstimate that combined pre-tax profits of all exchange companies crossed the half-a-billion-rupee mark in FY13, from Rs436 million in FY12. The rising trend in business volumes indicates that these companies will finish off FY14 quite profitably as well.

Business volumes of foreign exchange firms continue to rise because, based on investment-hoppers’ exchange rate outlook, dollar buying and selling has become increasingly a brisk business.

Two things have had a huge impact on forex firms’ business over the last five years: first, Pakistan’s precarious external sector account, and second, feared political instability.

“Both mean more business and speculation opportunities for them,” says a former executive director of the SBP. “That’s why we saw combined pre-tax profits of exchange companies rising fast in the last five years.”

In FY09, when the rupee was battered heavily and had lost 19 per cent value against the dollar in the interbank market, the cumulative pre-tax profits of exchange companies shot up to Rs426 million, from around Rs115 million in FY08.

But in FY10 and FY11, when the rupee lost five per cent and just 0.5 per cent of its value against the greenback respectively, profits of forex firms also fell to Rs386 million and Rs266 million respectively. And in FY12, their profits rose again, to Rs436 million, when a full nine per cent depreciation was recorded in the rupee’s value against the dollar.

“What these statistics almost conclusively establish is that a larger fall in the rupee’s value results in higher profits of exchange companies. But what is even more important is that it’s actually the volatility in exchange rates and just the year-on-year fall in the rupee’s value that gives them a chance to make bigger profits,” says a central banker.

Perhaps that is why executives of exchange companies are optimistic about having made increased profits in FY13, when the exchange rates remained extremely volatile, but the rupee declined by just 5.4 per cent.

Meanwhile, operations of exchange companies are now being monitored more minutely by the SBP than ever before, as central bankers suspect the involvement of some of them in the smuggling of foreign currencies out of Pakistan and illegal electronic forex transfers abroad. The reporting requirements have been tightened.

The Federal Investigation Agency (FIA) and the SBP have now agreed on joint vigilance at airports and other exit points to check the smuggling of foreign currencies out of the country. Currently, the maximum amount one can take out of Pakistan in cash is $10,000, but the FIA’s often lax attitude results in much larger per-person outflows.

Forex companies that take non-dollar foreign currencies out of Pakistan to sell the same in Dubai and bring back the sales proceeds in dollars are treated differently. No limit is imposed on them, and they only have to satisfy the regulators about the genuineness of their operations and the legality of their transactions.

Airport authorities at Dubai also monitor such physical movements of dollars and non-dollar foreign currencies according to their own laws, and inform Pakistani authorities if they spot any case of wrong declaration.

“The deployment of SBP staff at airports is good for us because it was quite difficult for the FIA alone to challenge the cases of misdeclaration on spot due to their lack of proper knowledge of SBP regulations,” says the owner of a local exchange company, while citing a few such instances in the past four to five years.

Officials of exchange companies of high repute say that the SBP-FIA joint surveillance is also helpful for them because in the presence of the SBP staff, it is easier for them to point out any misinterpretation of rules and regulations by the FIA staff. From the operational point of view of forex firms, it is also important when and how the central bank seeks their support to build up forex reserves or to sell dollars through them to dampen the ongoing dollar-buying spree.

“The SBP has, twice or thrice, intervened in the open market so far this fiscal year by supplying dollars to some forex companies and requiring them to keep their own dollar-selling rates at desirable levels,” reveals the owner of a large local exchange company. “And the central bank has also bought dollars from us to buffer its forex reserves on more than one occasion.”

Even routine operations of forex companies require them to surrender the dollar equivalent of the non-dollar currencies they buy locally and then sell in Dubai. Besides, the dollars collected by exchange companies in all other forms are also eventually sold into the interbank market.

“We only keep with us whatever is required to keep our day-to-day operations going. And our requirements increase substantially during the Hajj season, when intending Hajjis buy dollars from us. More importantly, people nowadays send foreign exchange to their relatives studying or receiving medical treatment abroad more through exchange companies and less through banks.”

Some banks like NBP and HBL also run their own exchange companies. And this helps them in attracting more home remittances.

However, as bank-run exchange companies don’t operate in disturbed parts of big cities like Karachi and have a nominal presence in Balochistan and KP, there is a need to allow ordinary forex firms to expand their branches into these areas.

“This is an area where the SBP has been pursuing a wait-and-see policy,” complains the owner of a Karachi-based exchange company, while complaining that applications for new branches are not being entertained. —Mohiuddin Aazim