Forex regulations

July 23, 2019

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THE recent amendments to the Foreign Exchange Manual are causing some alarm among the exchange companies because they are being read to mean that the government is on a path to wind up the business of the latter and let banks have a free run of things in the open foreign currency markets. Specifically, amendments made to three chapters of the manual announced on July 20 allow banks to enter the business of buying and selling foreign currency to retail clients, that had been catered to exclusively by the exchange companies thus far. Even though the scope of the allowance given to the banks is restricted thus far, the apprehension has spread that in the days to come, the State Bank will open the doors completely to banks to conduct this business. On the face of it, the development sounds like a positive one for retail clients since it will expand the choices available to them to meet their foreign exchange needs. The apprehension of the exchange companies is justified only if the steps being taken by the State Bank to broaden participation in the kerb markets are followed up by decertification of the exchange companies. But short of that, if the exchange company heads are only concerned about the expanded scope of competition that they will face, then their worries should be ignored.

For many years now, the State Bank has struggled to regulate the actions of the exchange companies. The spread between interbank and the kerb exchange rate cannot be allowed to expand too far, and there are apprehensions felt by the State Bank that the exchange companies abuse their dominant position in the market to withhold supply of foreign currency on certain occasions, and thus play a role in forcing a depreciation even when the fundamentals do not call for one. This has happened on a number of occasions in the recent past, prompting the State Bank to summon the heads of the exchange companies, who in turn present the argument that it is the banks that are creating a shortage in the market. Faced repeatedly with this situation, it is only natural to expect the bank to find a way to correct what may be a built-in flaw in the foreign currency markets. The State Bank should proceed with its reforms with the exclusive aim of putting the forex markets on a sound footing.

Published in Dawn, July 23rd, 2019