THE State Bank of Pakistan’s new directive to exchange companies to submit their day-end closing buying and selling rates for six major currencies to the Foreign Exchange Companies’ Association must boost forex market governance and improve transparency in the open market. The top exchange firms, with a combined market share of 75pc, will now be required to share this information with the association at the close of each day for a more “robust, reliable determination” of the exchange rate. The measure is part of forex market reforms initiated in September to tighten regulatory control over open market operations, reduce volatility, and contain illegal dollar trade and outflow. The bank has already given smaller exchange companies three months to transform themselves into full-fledged forex firms, mandated all firms to increase their capital from the current minimum requirement of Rs200m to Rs500m, excluding losses, by end-December, and instructed the leading banks to “establish their wholly owned exchange companies to cater to the legitimate foreign exchange needs of the general public to foster efficiency...”.

Tighter controls over the forex market and consolidation of smaller firms in the ‘B’ category engaged in the sale and purchase of foreign currencies only had become inevitable in the wake of the quick currency depreciation after the government adopted a market-determined exchange rate and agreed with the IMF to a maximum difference of 1.25pc between the interbank and open market exchange rates over any five consecutive working days. Concerns were raised over the weak operational structure and inadequate compliance levels in the forex market that had led the rupee to fall to an all-time low, the fast erosion of SBP reserves and massive illegal dollar outflows. Though the reforms are crucial for exchange rate stability, the government should take stringent action to control under-invoicing of imports to improve dollar inflows through remittances. Treating one symptom and not others cannot fully restore the market to health.

Published in Dawn, December 28th, 2023