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Exchange companies misery under new rules, regulations

In a fresh move against money laundering in the country, the State Bank of Pakistan (SBP) has directed money-exchange companies to keep a record of any transaction worth $500 or more. As per the new instructions, exchange companies are required to keep a copy of the identity card or passport of the person involved in the transactions. The Central Bank has directed the companies to identify the people who engage in transactions of the dollar. There are more than 50 foreign exchange companies operating in the country. 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.

Previously, it was binding on all the exchange companies to ask for the Central Bank’s approval for all outward remittance transactions of $50,000 or above.

Exchange companies have demanded the SBP to abolish the Pakistan Remittance Initiative (PRI) and provide exchange rebate to the remitter directly to boost remittance flows. Around 50 percent of remittances are coming into Pakistan 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 Federal Board of Revenue (FBR).

Moreover property tax and excise taxes are paid to the provincial governments. Remittances in exchange companies witnessed a 50 percent decrease in the last fiscal year. The country’s key foreign currency exchange companies recently faced acute shortage of dollars to meet the rising demand.

A year back, the Central 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.

In the last fiscal year, the Central Bank kept the Pak rupee overvalued at Rs 104.85 despite the claim from the International Monetary Fund (IMF) and other donor agencies that it should have depreciated. The government and the Central Bank repeatedly rejected the depreciation of the rupee in the last fiscal year, as the officials claimed that the economy of the country was stable and they would not allow any devaluation of the currency. The central bank made 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 rupee has now depreciated to 116 to a dollar. The analysts do not foresee any major adjustment in the Pak Rupee in future 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. The year 2016 witnessed stability in inter-bank rate, a 3 percent devaluation might not be ruled out in 2017. 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 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.

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 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 percent Sales Tax. Former Finance Minister Ishaq Dar had taken back the decision of the FBR and the Sindh Revenue Department in 2014 and assured these taxes would not be levied on the exchange companies.

Exchange Companies are already paying 33 percent income taxes to the federal government and six percent 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 Rs 104.77. 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.

Though banks enjoy government’s incentives on fetching remittances, yet exchange companies do not enjoy any incentive. 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. Exchange houses demand the government to enforce the ban on the smuggling of US dollars to Dubai via Pakistan-Afghanistan-Dubai. It has also been demanded by the exchange companies that they should be allowed to provide remittance/currency facilities to trade-related business.

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