More SBP curbs

With forex reserves depleting fast, SBP is trying to do anything under the sun to control the outflows. The latest move is to limit the spending of credit cards and debit cards on international transactions. The annual limit is set at $30,000 per individual on credit and debit cards (both inclusive). The limit is per individual, not per card i.e., if you have five cards and three supplementary cards, the collective limit of all eight cards is capped at $30,000 per year.

There are challenges in implementation; but before delving into operational issues, let’s go through the background of imposing these limits. Ever since (in Dec 21) SBP imposed the per person limit of buying foreign currency at $100,000 per year (on cash withdrawal and outward remittances), the use of credit cards on international transactions has increased. Then with the imposing of informal bans/limits on outward payments and L/Cs opening (since June 22), the usage of commercial transactions has increased on personal cards.

In the last twelve months (from Dec21 to Nov22), the spending on international transactions on credit and debit cards stood at around $1.2-1.3 billion. And the run rate in the last 2-3 months has increased to $1.4-1.5 billion per annum. With newly imposed limits, SBP expects the transaction values to decline by at least $500 million a year.

According to sources, there are clear elements of misuse of credit and debit cards for international transactions. Some people are using it for outward remittances, while others were disguising commercial transactions through spending on personal cards.

Why was this happening? Simply, when SBP put curbs on the right path, people tend to find alternate routes which might not be strictly legal. Now with limits on credit cards, the usage of hundi/hawala to increase and that would dampen the inward remittances further.

The prevalence of misuse is clear. There are multiple card holders who have spent over million dollars on international transactions in the last twelve months. That is not real. One business tycoon- residing outside Pakistan while earning in Pakistan- told BR Research in January 2022 of his increase in use of credit card issued in Pakistan for transactions in his residing country, as his yearly spending is much higher than SBP’s annual limit of $100,000.

There are many cases like him. Many business groups in Pakistan have families living abroad. Their cash flows are generated through businesses operating in Pakistan and they spend all over the world. Then there are multiple incidences where personal cards are being used for commercial purposes. There are SBP manuals for specific payments which people are bypassing by using personal credit cards where no questions are asked. Some identified cases are of machinery buying and commercial payments abroad on payment against services.

A banker said that people have started to deposit cash with banks to enhance the limit of credit card issued by the bank. For example, if you have a limit of Rs1 million on your credit card, you can deposit Rs10 million as cash collateral to enhance the effective limit to Rs11 million. Many are doing it. And if the limit to max in three days, someone from your staff would pay the bank to reroll the limit.

Now SBP has imposed a much smaller limit. But there are operational hitches. Such limits cannot be imposed by a mere meeting or passing simple instructions. People are using multiple cards through multiple banks. First, the challenge for a specific bank is to bifurcate between international and domestic transactions. Not every bank has that system. The second challenge is to communicate between different banks. Bank A must timely inform Bank B on Mr. X international transactions.

The systems would develop and mechanism will form to enforce the limit. But people will find alternative ways. One is to have an independence card for every person in the family of the age of 18 plus. Banks may use the credibility of Mr. X to issue independent (not supplementary) cards to his wife and other dependent adult family members. Will there be a case of using benami cards?

The other problem is of enhanced usage of hundi/hawala. One parliamentarian recently asked in a gathering on how he or other rich people can live on $30,000 limits when they have $10,000 or more to spend on hotels booking. The other industrialist standing next to him said that net-off with your friends and family living in the country of your visit. For example, Mr. X visiting the UK can ask his doctor friend living there to give him Pound sterling in UK and his staff in to pay his family in Lahore in PKR to whom the expat sends regular remittance.

The point is that there would be some decline in credit card flows; but part of it would find another route. The need is to address the root cause i.e., dollar shortage. And the curb should be on reduction in travelling and related expenses which would reduce credit card usage too.