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How exchange houses operate in an era of strict compliance and regulation

There are more than 50 foreign exchange companies operating in Pakistan. The majority of foreign exchange transactions are handled by the banks in Pakistan, while the money changers handle only upto 25 percent of the market share. Though banks enjoy government’s incentives on fetching remittances, yet exchange companies do not enjoy any incentive. It is binding on all the exchange companies to ask for the central bank’s approval for all outward remittance transactions of $50,000 or above.

Last year, the State Bank of Pakistan (SBP) bank issued new regulations for exchange companies, allowing them to export all foreign currencies other than the US dollar and to import dollars against these foreign currencies. In another regulation, the central bank advised exchange companies to accept all types of dollars. The exchange companies contended that commercial banks were even not depositing small denomination, old or stapled dollars into the accounts of depositors. The exchange companies mainly export these dollars to Dubai resulting in one to three percent loss on exchange of these dollar notes. Therefore, the companies are accepting small denomination, old or stapled dollars at lower exchange rate, while banks categorically reject these greenbacks.

The exchange companies have to continue their operations under stringent regulations by the central bank to check money laundering and terrorist financing. These companies are even not privileged to take dollars from banks to meet the rising demand. The central bank has kept the Pak rupee overvalued at Rs104.85 despite the claim from the International Monetary Fund (IMF) and other donor agencies that it should have depreciated.

Given the drying up foreign remittances in the Kerb market, lower inflows and higher demands; the exchange companies in Pakistan are facing tough times due to dearth of dollars. With a widening trade deficit and low foreign direct investments, the country largely depends on its remittances to improve the balance of payment position. Some observers believe that the country’s remittances have been stable for the last few years despite lower exports and Foreign Direct Investment (FDI). The remittances declined after a restructuring of property valuations on sale and purchase of land throughout the country. Overseas Pakistanis were sending their hard earned money back to Pakistan for the purchase of property and earning a profit.

The government and the central bank have repeatedly rejected the depreciation of the rupee in the current fiscal year, as the officials claim that the economy of the country is stable and they will not allow any devaluation of the currency. The State Bank of Pakistan (SBP) is making every possible effort to reduce the gap between the inter-bank and Kerb market rates. In its effort, the central bank even exempted the exchange companies from surrendering 10 percent of dollars to the banking system against its exports of other foreign currencies.

The analysts do not foresee any major adjustment in the Pak Rupee in 2017 on the back of expected China-Pakistan Economic Corridor (CPEC) inflows, while the exchange companies are not ready to bring the US dollar’s rates down in open currency markets. Last year witnessed a stability in interbank rate, a 3 percent devaluation may not be ruled out this year.

Remittances in exchange companies witnessed a 50 percent decrease in the last six months of the current fiscal year. The country’s key foreign currency exchange companies are facing a shortage of dollars to meet the rising demand.

TAX BURDEN

Last year, all the exchange companies threatened to shut their businesses if the federal and Sindh governments imposed any new taxes including Federal Excise Duty (FED) or Sales Tax (ST). All the exchange companies have received separate notices from the Federal Board of Revenue (FBR) and Sindh Revenue Department to levy Federal Excise Duty and the Sales Tax on all the exchange companies from July 1, 2013.

The federal government was planning to collect 16 percent FED on gross profit of exchange companies while the provincial government would receive 14 pe cent Sales Tax.

Exchange Companies are already paying 33 percent income taxes to the federal government and six per cent on rent, and if the federal and provincial governments levy taxes of another 30 percent on exchange companies, it would be an injustice with them, according to Pakistan Forex Association (PFA) President Malik Bostan.

The decision of the governments might hurt the exchange rates and remittances inflows, while the dollar already started moving up in the open currency market after this notification. The dollar is being traded at around Rs 106 in the open currency market. The dollar in interbank market stands at Rs104.77. The exchange companies would pass such burden on to the customers. The dollar would go up against rupee destroying all efforts of the government to maintain a balance in the exchange rate.

Around 50 percent of remittances are coming into the country through exchange companies and these transactions are made free of cost. However, banks are getting a benefit under a State Bank scheme that allows them to charge a fee on each transaction.

The foreign transfer companies take 10 percent of inward remitted amounts while they have to pay 10 percent tax on each expense amount to the FBR. Moreover property tax and excise taxes are paid to the provincial governments.

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