When it comes to clamping down on foreign exchange transactions, it seems the Naya (read: independent) State Bank, and the purana finance minister of PML-N are of one mind. Earlier this month, the central bank issued instructions to banks prohibiting forex payments under direct carrier billing by telco’s. The move drew sharp rebuke from observers, who criticized SBP for its insular approach. The regulator may very well be a dinosaur, but have telco’s done no wrong?
Two things are often true at the same time: regulators habitually engage in bureaucratic overreach; and, firms attempt to circumvent cumbersome regulation for as long as they can, without getting called out. In a normal country, firms engage knowingly (or unknowingly) in procedural violations. When audits identify these infarctions, regulators impose penalties. Businesses pay those penalties, undertaking to ensure better compliance in future. Where existing rules are ambiguous or vague, regulators and businesses sit together to fine tune them. But only in Pakistan does it turn into a full blow national reputational crisis, bringing into question sovereign’s probability of default!
Is it all really that surprising, though? At a time when legitimate dividend payments by foreign owned businesses are being suspended /delayed for months, it’s hardly shocking that SBP would come down hard on all outward forex transactions which hitherto took place under ambiguous conditions. The $34 million may very well be a nominal amount but disallowing it does not prove that Pakistan is running out of forex. Just that the regulator is no longer in a mood to turn a blind eye. Therefore, the moral indignation by telco’s is a tad out of place.
Unconvinced? SBP accurately insists that by making payments to Google and others under direct carrier billing on behalf of the end-consumers, telco’s were engaging in foreign exchange payments for commercial purposes, a business activity that they are not licensed to. SBP’s press release lays special emphasis that these payments were being made by telco’s under the approval of acquisition of IT related services’ “for own use”. The irregularity is both damning and self-explanatory.
Could SBP have handled the situation better? Of course. Although telco’s are not directly regulated by the central bank, they are now an integral part of the local payments ecosystem. The companies could have quietly been informed to pause or phase out the DCB business. Better yet, SBP could have allowed payments of already incurred liabilities under a temporary mechanism while retrospective approvals were sought simultaneously for past transactions, and token penalties paid. Regardless, given the sheer number of end-consumers using these services, SBP must still put the house in order. Why risk scaring off global tech giants with your heavy handedness in the interim?
But telco’s can hardly feign ignorance either. That Pakistan operates under a closed foreign exchange regime is no secret. The fact that all non-banking firms must seek prior regulatory approvals whether for payment of regular invoices for acquisition of software, or payment of dividends - and designate a bank for this purpose as well - is itself evidence that non-banking firms are proscribed from engaging in any foreign exchange transactions directly for commercial purposes. Deplorable? Not just. The existence of the FE manual is downright unfortunate too.
Yet, even bad rules are still rules. When a regulatory environment is unfriendly for business, you engage in advocacy efforts to prompt a change to the rules of the game. If it remains stubbornly insular, you opt out of the market. But engaging in a PR war is hardly a respectable way to go, neither for the central bank nor for businesses. When technology evolves, use-cases change; rules should adapt too. But you got to’ ask for it!
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