Inter-linked with SBP to reap the copious benefits of market standardization


May 23 - 29, 2005



The President of Pakistan, in order to formalize the second-tier Foreign Exchange Market (money changes), promulgated the Foreign Exchange Regulation (Amendment) Ordinance, 2002 on July 20th 2002, whereby amendment had been made in the Foreign Exchange Regulation Act, 1947 and Exchange Company (Financial Auxiliary) status was evolved.

State Bank of Pakistan, in line with this Ordinance, issued F.E. Circular No. 9 dated July 30, 2002, thus framing the incorporation procedures and scope of business activities of these Exchange Companies. As an ancillary to this significant policy a target of July 30 , 2004 was communicated to the non-formal curb market for their essential conversation into conventional Exchange Companies. Later on to facilitate this mammoth infrastructural transformation, Category B Exchange Companies, Franchises and Currency Booth Franchises, were introduced and allowed to work under the umbrella of Financial Auxiliaries status.

This transformational policy was well received and the first exchange company was formed and commenced its operations from 6th February, 2003. Since then the whole Foreign Exchange Curb Market had been converted into well knit and well organized network of Exchange Companies, Category B Exchange Companies and Franchises all over Pakistan evolved as a formidable and condign partner-cum-subordinate to first-tier Foreign Exchange Market (banks).

Now, after more than two years, since first Exchange Company's incorporation, the tally stands as following:

a) Exchange Companies


b) Category B Exchange Companies


c) Franchises, Currency Booth Franchises and branches of (a) & (b) above

over 200



These Financial Auxiliaries are comprehensively interlinked with central bank's integrated financial reporting framework to reap the copious benefits of market standardization.

Need of such grandiloquent change was felt due to the following facts:

DOCUMENTATION OF ECONOMY: Formulation of an efficient statistical system for acquisition and dissemination of data/information in pursuance to obtain the overall goal of achieving the soundness of the domestic financial system for sustainable healthy growth and prosperity of the country as well as to harmonize it with the internationally acceptable standards. The data collection ensures the prompt and accurate foreign exchange strategic and budgetary planning of Pakistan. Exchange Companies, being the ardent contributor to the national exchequer, leads to the broadening of tax base of the country. Granting of Companies status may also ensure the compliance of generally acceptable principals of good corporate governance.

INWARD REMITTANCES MANAGEMENT: Rapid increase in repatriation of foreign earnings by foreign residents poses the dilemma in their efficient handling. Post 9/11 foreign exchange inflows were too exorbitant to be solely managed by banks and due to their methodical but slow processing, a huge portion of foreign exchange influx was routed through unorthodox, illegal and rather unsafe ways of hawala/hundi, thus creating problems in statistical data collection. Exchange Companies were befitting answer to such problems.

The collaboration of domestic exchange companies with their foreign counterparts as well as setting up of own branches in foreign countries on one hand creates the possibility of swift funds transfer to any geographical location in Pakistan thus providing a dependable alternative to the foreign resident Pakistanis (for the funds kept and invested abroad) and on the other hand ensures the safe, legal, quick and cheap transfer of funds. Hence, elevating the clean and liberal image of Pakistan's financial and economic system in global community. The volume of inwards remittances and its gradual increase ($3,046.16 million in July-March 2004-2005 period as compared to $2,840.45 million in July-March 2003-2004) is a sufficient evidence of its pivotal role in countries monetary system.

FOREIGN EXCHANGE RESERVE AND RATE MANAGEMENT: The foreign exchange reserves of Pakistan stands at $13,000.2 million as at April 30, 2005. It has being four times of the position in 2000-2001 where the reserves stood at $3,219.5 million. In contrast to that the external debt of the country to outside world is hovering around $34,000 million. GDP growth rate of approximately 6.4% assures the tremendous prosperity in the country's economy but also creates gigantic pressure on the foreign exchange reserve mainly due to increase in trade deficit at an alarming rate. Evidently the trade deficit of Pakistan mounted from $1,527.3 million in 2001-2002 to $4,262 million in 2004-2005 due to heavy import of technical machinery for infrastructure development as well as BMR of the existing industry, mainly textile sector.

Currently, the main goal behind the Pakistan's foreign exchange policy is not only to maintain the existing levels of foreign exchange reserves but also to sustain the growth rate together with the efficient foreign exchange rate management.

Steps taken by SBP in an endeavor to achieve said goals are: (i) Liberalisation of foreign exchange policy. (ii) Strict vigilance of county's monetary system and (iii) Prompt, accurate and comprehensive financial reporting framework.

ANTI-MONEY LAUNDERING: In recent years, and especially since the events of September 11, 2001, worldwide efforts to combat money laundering and the financing of terrorism have assumed heightened importance. Money laundering and the financing of terrorism are global problems that not only threaten security, but also compromise the stability, transparency, and efficiency of financial systems, thus undermining economic prosperity.

The global agenda to curb money laundering and the financing of terrorism calls for a cooperative approach among many different international bodies. Efforts to establish an international standard response against money laundering and the financing of terrorism have been led by the Financial Action Task Force on Money Laundering (FATF) and through the development of the FATF 40 recommendations serve as the international framework for AML efforts.

In response to the global requirements, Exchange Companies were formed with the predefined scope of work, reporting framework and special emphasis on formulating Know Your Customer (KYC) policy. KYC policy discourages the unidentified, unusual and suspicious transactions and urges their reporting to the competent authority. SBP, by keeping a close look at Exchange Companies business transactions ensures that no illicit activity can take place through our financial system.