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SBP’s New Foreign Currency Rules to Reverse the Negative Trend: Economist

The State Bank of Pakistan (SBP) has updated the regulations governing the selling of foreign exchange to individuals by exchange companies in order to curb the demand for the US Dollar in the local markets.

The central bank has added new limits for the purchase of foreign currency to limit speculative trading and ascertain currency sales without affecting the ability of the market to serve the genuine needs of the public. But how does it really work?

Economist A. A. H. Soomro explained that the Pakistani Rupee is currently under pressure from rising import bills due to global commodity inflation, elevated energy prices, the reduced inflow of remittances, and the rising domestic demand for imported goods.

Consequent to these amendments, exchange companies are required to ensure that no individual will purchase foreign exchange in excess of $10,000 a day and $100,000 per calendar year. Additionally, individuals will be able to avail of the facility of remitting educational and medical expenses abroad up to $70,000 per calendar year and $50,000 per invoice respectively from banks.

These limits have been set in consideration of an individual’s personal needs for foreign exchange. The exchange companies will obtain supporting documents against the sale of foreign exchange in excess of $1,000 (or its equivalent in other currencies) to substantiate the purpose of the transaction.

Soomro added that these limits are in addition to numerous other steps by the SBP to rein in the outflow of the dollar which is severely denting economic confidence by adding pressure to the local unit.

For context, here is what the central bank has done so far:

• A hiked interest rate of 100bps to 9.75 percent (14 December).

• A hiked interest rate of 150bps to 8.75 percent, and Monetary Policy Committee to meet eight times a year (19 November).

• An Average Cash Reserve Requirement from five percent to six percent, and a Minimum Cash Reserve Requirement from three percent to four percent on-demand/time liabilities up to one year (13 November).

• Forex limitation for Afghanistan at $1,000 per visit, $6,000 per year. Biometric verification for invoices exceeding $500, and cheques / other instruments for above $10,000 (6 October).

• 100 percent cash margins on 114 items, total 525 items (30 September).

• Curbs on Auto-financing (tenure: from seven to five years; debt to burden: from 50 percent to 40 percent; amount: Rs. 3 million, minimum down payment: from 15 percent to 30 percent. Limits are not applicable on Local EVs & up to 1000cc (23 September).

Soomro suggested that with all the measures now gearing on equal footing towards establishing forex support, it is expected and hoped that the import pressure will subside by February/March 2022. The rupee’s trend should also reflect a similar trajectory that echoes the improvements in the trade deficit, he said.

Investors have been disappointed by how the rupee has performed in the last few months because of exogenous factors. The actions of the State Bank and the expected mini-budget on 22 December are proactive measures to prevent a bust and ensure a soft landing of the growth. This time, it is different from 2017’s red flags, and across a larger timeframe, a few months of imbalances are survivable.

A lot of remedial actions have been taken in three to four months, and the next two to three months will tell whether they were enough, he said.

The economist also expects disbursements from World Bank and the Asian Development Bank to further stabilize the exchange rate, as investors appear confident that the confidence of global lenders is back.

The rupee has notably lost 13.01 percent, as of 17 December, on a fiscal-year-to-date basis after recording another all-time low, besides depreciating by 11.39 percent on a calendar-year-to-date basis. The local unit has lost 0.19 percent against the US Dollar on a week-on-week basis, and has depreciated by 1.32 percent on a month-to-date basis.

Moreover, Pakistan’s liquid foreign reserves had an outflow of $90 million on account of debt servicing in the week that ended on 10 December 2021. The data released by the State Bank of Pakistan (SBP) showed that the foreign exchange reserves decreased to $18.56 billion in the week. During it, the foreign exchange reserves of commercial banks stood at $6.4 billion.

Source: Pro Pakistani

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