The untamed frontier of foreign exchange

A stable and predictable forex market is a beacon for foreign investors. Their confidence fuels economic growth, creates jobs, and bolsters a nation’s financial strength. Foreign exchange reserves act as a financial cushion during economic crises, stabilizing currency and enhancing financial viability. These principles are globally recognized, but Pakistan’s financial landscape has a crisis to manage in this realm.

Non-compliance with the regulatory framework within the foreign exchange market has sown the seeds of chaos and unpredictability, jeopardizing the nation’s financial stability.

Drawing from my experience as the Chairman of the Board of Investment, I understand the challenges of regulating the forex market, but this issue demands immediate attention for resolution. We need reforms to address current shortcomings to stabilize the rupee’s value and impose checks on exchange firms.

A broader view of Pakistan’s economic landscape reveals inflation, a falling rupee, reduced exports, heavy reliance on imports and illicit buying and hoarding of US Dollar through money exchanges causing the rupee to depreciate continuously. The prevalence of Hundi/Hawala transactions, owing to a lack of legislation, exacerbates trade imbalances.

Conversely, the significance of contribution by banks in Pakistan’s economy is immeasurable. They are a heavily regulated, compliant sector that has stimulated economic growth, created jobs, ensured financial inclusion, and managed financial risks.

Banks have evolved as not just service providers; they are integral to the nation’s progress and prosperity. The new digital financial realm is positioned for greater inclusivity with much larger bandwidth.

The State Bank of Pakistan (SBP), always vigilant, has issued directives for 10 banks to establish their exchange companies to facilitate customers’ forex transactions. Additionally, the SBP advises banks to provide these services through their extensive branch networks, on the other hand standardizing regulations and ending A, B, and franchise exchange companies’ separate rules will ensure uniformity and strengthen the forex market along with bringing much-needed transparency and documentation.

Backing the banking sector is a wise move, given their significant contribution to the nation’s economy through tax contributions and job creation. Conversely, exchange companies predominantly favour a limited group of individuals, and their operations often involve areas that are rather grey and laden with ambiguity.

This move opens doors for new, reputable exchange companies, providing transparency and enhanced services to customers, ensuring transparency and documentation.

To address smuggling’s influence on the forex market, the Chief of Army Staff’s commitment can catalyze reform efforts. Law enforcement agencies have actively countered unlawful trade and black market operations, but these strategies must be supplemented with a thorough examination of global best practices. Several competitive economies have successfully turned their financial markets around, establishing long-term legislative frameworks.

There is an urgent need for regulations and their strict enforcement, the foundation for curbing unlawful activities by exchange companies.

While many ideas can work, issuing of forex bonds to the local population can mitigate speculation and short-term uncertainty immediately, discouraging hoarding of foreign currency. Also support for the banking sector, crucial to the economy through tax contributions and employment generation, should extend into the digital financial landscape, encompassing forex trade through Bitcoin and crypto-currencies.

Revamping the forex market is pivotal to unleashing Pakistan’s economic potential. Transparent regulations, supported by strong enforcement, must be implemented alongside innovative financial instruments. Collaboration between regulatory authorities, financial institutions, and law enforcement is key to building a stable, reliable, and prosperous forex market. The time for change is now, and it’s within our grasp to realize a brighter economic future.

Copyright Business Recorder, 2023