The SBP finally came up with tightening measures in foreign exchange transactions. Better late than never. Pakistan foreign exchange regime has always been more liberal than the region. This along with excessive protection to domestic industries provided a conduit for people to make money in Pakistan and remit it outside to diversify savings avenues. The SBP, in days of brewing external account crisis is imposing restriction to check on dollar outflows and to curb dollarization.
It’s a good decision. With currency moving from Rs152/USD to Rs178/USD in a few months, everyone is looking to convert savings into USD. With everyone chasing dollar, the demand of dollar will go up putting further pressure on PKR. It was creating a self-feeding loop. This must be stopped. Earlier, the restrictions were imposed in terms of KYC. Now limits are being introduced.
The SBP has amended the regulations governing sale of foreign exchange to individuals by exchange companies. With changes, any individual will not be able to buy more than $10,000 per day from all the exchange companies and $100,000 per year in the form of cash or outward remittances. Nonetheless, for education and health purposes, individuals can remit out $70,000 per year and $50,000 per invoice in addition to above mentioned limits.
Pakistan’s lopsided foreign exchange regime and domestic industrial protection has contributed a lot in frequenting boom and bust cycle. Companies are protected against imports and create economic rents, which fatten the incomes of individual owners of the companies. These individuals can convert earnings from PKR to foreign currency and park in FE25 accounts. From these FE25 accounts, they can easily remit money outside without any restrictions. People have sent millions of dollars per years to buy real estate abroad. And it is all declared and legal.
Even if the earnings are not from rent seeking, whoever makes money in Pakistan becomes bearish on the country. They want to protect the wealth created here by taking the money outside Pakistan. How can the country prosper without utilizing the savings generated into meaningful investment? This savings-investment gap is primarily the current account deficit.
However, the step taken by the central bank is to address the immediate need of improving the foreign currency demand and supply situation. The current account is likely to peak in November. Going forward, this may taper off. With commodity prices coming down and demand tapering, the deficit could be milder.
Nonetheless, the SBP needs to do more. The next step should be to discourage leisure travel spending, SBP should increase the tax on credit card spending outside Pakistan. It is a tough time. We need to tighten belts as a nation. And once this crisis is over, SBP/government should think of fixing this lopsided incentive structure of protection and liberal foreign exchange regime in a permanent way.
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