The ministry of finance and the State Bank is expected to soon revamp Pakistan Remittances Initiative for providing exchange companies incentives to boost remittances through formal channel.
“We’ve been pressing the government for a long time to treat us at par with banks so that we can bring in more of home remittances. After a series of consultations among all stakeholders and at the topmost political level we have been told now that the ministry of finance and the central bank are going to enlarge the scope Remittance Initiative for this purpose,” chairman of a leading FX company told Dawn. State Minister for Finance Saleem Mandviwala plans to boost remittances from $13 billion plus in FY12 to $20 billion in next two years once FX companies get the proposed incentives.
Officials of Exchange Companies Association of Pakistan (ECAP) claim that FX companies are well-positioned to attract home remittances from across the globe and to deliver the same to designated beneficiaries throughout the country because of the very nature of this business.
They say that if FX companies start getting $25 on every $1000 of home remittances right now (as commercial banks get) they can haul in an additional $1 billion within this fiscal year.
“And going forward we can guarantee that FX companies would be handling no less than $5 billion per year.” claimed chairman of a Karachi-based FX company. State Bank officials estimate that the share of exchange companies in total remittances inflows is currently 10 per cent (or roughly $1.3 billion per year) but operators of FX firms insist their actual contribution is more than double this figure. They say the difference (in theirs and the SBP’s estimates) lies in technical details of the ownership of remittances’ handling.
One big constraint in growth of FX companies’ business is that encashment of remittance documents handled through these firms normally do not earn a certificate, exempting the money from payment of taxes in Pakistan. Similar documents processed by banks are eligible for such certification. The changes that are now being introduced to PRI would also address this issue.
About two dozen first class FX companies operate across the country and they are also allowed to establish their franchise. In addition to them 28 other FX companies are also engaged in foreign exchange buying and selling but they are not allowed to generate remittances from abroad.
Owners of first class FX companies say in the last couple of years they have been rather discouraged by the regulators from opening franchise businesses in remote areas of the country which has resulted in expansion of illegal transfer of foreign exchange to and from Pakistan.
Lately, the central bank has made reporting rules stricter to ensure transparent operations of FX companies and now the central bank appears more open to granting permission for expansion of franchise network of FX companies.
Just a week ago SBP allowed two full-fledged FX companies to start operations from Lahore and Gujrat. But at the same time it cancelled the license of an existing FX company that had remained inoperative for some time.
A former central banker said, “Now they (forex firms) are no longer money changers… their businesses have become very well regulated as FX companies… we have very little issues relating to KYC (know your customer). I think these companies are now more ideally positioned to help us generate larger inflows of home remittances than in the late-1990s.”
For last two years an intense debate is going on in policymaking circles both in Islamabad as well as in Karachi on how to use the hidden potential of FX companies in boosting remittances. “Initially vested interests managed to block or delay implementation of whatever was being decided — and mind you, at the highest political level. But now that the government is nearing its term in office we hear that PRI is being revamped to give us a greater role. But it’s never too late,” remarked an official of ECAP adding that he hoped that the proposed changes in PRI would be announced shortly.
Competition between the FX companies owned by banks and the ones run by erstwhile money changers or private parties has always made it difficult for FX companies to win a level playing field. “Banks oppose a level playing field for FX companies as they know that these companies would snatch a large part of remittances’ business from them,” says a FX firm executive.
Bankers say FX companies meet foreign exchange supply requirements responsibly but they allege that “some of these companies still connive with influential people who take out hundreds of millions of dollars worth of ill-gotten wealth out of Pakistan. Instead of denying FX firms a greater role and a level playing field, the regulators ought to ensure elimination of bad practices from these companies,” suggested a senior executive of state-run National Bank which, he said, “is not possible without active coordination between the central bank, customs authorities and law-enforcement agencies.”
Saleem Mandviwala recently said in remarks published in Dawn that by further mainstreaming of FX companies in remittances handling he hopes to bring in an additional $1.3-$1.5 billion of remittances through official channels. He also said that after revamping Pakistan Remittances Initiative he plans to take delegations of FX companies to Saudi Arabia, UAE and the UK where these companies would sign remittances handling agreements with exchange companies of those countries. These countries account for 62 per cent of our total home remittances.