Liquidity for interbank market: ECs may be offered Re1 incentive against each USD

ISLAMABAD: The government is likely to offer fiscal incentive of Re1 against each US dollar to forex companies to be surrendered to interbank being mobilized from inward remittances, well-informed sources told Business Recorder.

Sharing the details, sources said, the State Bank of Pakistan has stated that in order to bring more transparency in the FCY transactions and to curb the speculative demand of foreign exchange in the open market, it has recently introduced various measures related to sale of foreign exchange by Exchange Companies (ECs). These measures include: (i) imposition of daily (USD 10,000) and annual (USD 100,000) limits; (ii) requirement of supporting documents; and (iii) biometric verification and transactions through cheques/bank transfer. These measures are expected to be helpful in curbing the speculative demand of foreign exchange from ECs.

However, there is a need to divert the liquidity available with ECs towards interbank market. Currently, ECs are required to surrender 15% of USD mobilized through inward remittances and 10% of USD mobilized through export of foreign currencies other than USD, in the interbank market. Before the pandemic, the annual sale of USD mobilized by ECs to the banks was around 30%. However, during the pandemic, this ratio increased to 78% due to factors like travel restrictions, orderly exchange rate and lower demand for FCY etc. Now, this ratio has again started to decrease especially after August 2021, ie, after the change of regime in Afghanistan.

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With a view to ensuring consistent supply of foreign exchange in the interbank market, ECs may be encouraged to mobilize more foreign exchange through inward remittances for onward surrender in the interbank market. For this purpose, the State Bank of Pakistan has proposed that ECs may be provided cash incentive of PKR 1 against surrender of each dollar mobilized from inward remittances, however, ECs may be required to surrender 100% of inward remittances in the interbank market. This incentive amount will be paid to ECs through SBP-BSC on monthly basis after receiving claims from the ECs and verifying the amount surrendered by them.

The average monthly inward remittances for first 5 months at FY22, are USD 200 million. Based on this trend, the expected annual inward remittances mobilized by BCs may reach to a level of USD 2.4 billion. Accordingly, an annual amount of approximately PKR 2.4 billion would be required to incentivize the ECs against surrender of foreign exchange in the interbank market.

For the next half of the current fiscal year, at present, a budgetary allocation of Rs 1.2billion would be required. In case the remittances mobilized by Exchange Companies increase beyond the above estimate, additional budgetary allocation will be solicited.

This incentive is expected to encourage ECs to mobilize remittances and will help them to attract customers who are lured by Hawala operations. Resultantly, it will facilitate in ensuring the consistent flow of remittances through formal channels, to the interbank market.

Considering the proposal of SBP requiring ECs to surrender 100% of inward remittances in the interbank market, Finance Division has proposed to provide a cash incentive of Re1 against surrender of each dollar mobilized from inward remittances. The funds amounting to Rs. 1.2 billion, as requested by the SBP, for the requisite purpose for the current financial year will be arranged through re-appropriation by the Finance Division, the sources maintained.

Copyright Business Recorder, 2021