The State Bank of Pakistan has offered to buy cash dollars from the banks with the aim of streamlining the availability of dollars for money changers and licensed exchange companies in the country. At present, banks send the cash abroad mostly to corresponding banks in Dubai and the Middle East institutions which credit the amount to Pakistani banks' accounts with banks in New York. As for other foreign currencies, SBP licensed exchange companies send their own cash and that of affiliated money changers to Dubai and bring back dollars.
The SBP offer to banks would in essence connect the two parallel tracks and reduce the gap between the banks' and money changers/exchange companies' dollar buy-and-sell rates, which sometimes widens due to shortage of cash dollars in the local currency market.
Banks should find the SBP offer attractive, for at present they send cash dollars through courier services such as Brinks every Monday and the funds are credited to their New York accounts a week later. The courier and insurance charges amount to dollar 1800/1900 per million dollars ie 6/7 paisas to a dollar, while the banks remain out of pocket for funds by at least one week.
This is precisely the reason why normally banks are shy of accepting cash from clients and tend to redirect them to the money changers. However, the situation is different in cities like Peshawar and Quetta as well as towns close to the Afghan border.
Most traders instead of opening letters of credit for imports tend to deposit cash with bank branches and these branches in order to retain business have to accept the cash. Those speculating in the open market in currencies, in connivance with bankers in the border towns, are thus able to distort the normal flows of dollars.
The Central Bank could have made it mandatory for banks to surrender their cash dollars to SBP. Such an order may have, of course, given a wrong signal, that SBP was mopping dollars as if the rupee was under some kind of a pressure. But the financial savings to banks on immediate electronic credit to their N.Y. account, should itself be an incentive for them. If any bank still continued to send cash dollars abroad directly, there must be some other motive.
Zero rating of sales tax, in the federal budget FY-06, on the entire chain of major export items such as textiles, leather, carpet, surgical and sports goods, besides the total abolition of import duty on raw materials used by these industries, should also reduce the demand for foreign currency in the open market.
Sales tax refunds (on the basis of so-called flying invoices) as well as over-invoicing (to avail of duty drawback facility) of the export items should help in bridging the gap between the kerb and official rates for dollars.
But, on the other side, the imposition of 0.1 percent withholding tax on cash cheques worth Rs 25000 and above, is expected to reduce the deposit growth and increase the cash-in-circulation. This will definitely be channelled into cash dollars unless we can keep the exchange rate stable and the gap between the rates in the two markets within tolerable limits.
SBP, therefore, needs to keep a close watch not only on the rate but also on the flows.
The tax evaded money as well as the regular savings will always be channelled into sectors giving a higher return. Risk averse investors will continue to keep money in National Savings Schemes and bank accounts. But those looking for higher returns will always go to the stock market, or park their investments in gold, real estate as well as foreign currencies such as the dollar, Euro or the sterling. It is difficult for Pakistanis to keep money abroad in banks, but they can still stack away the cash in foreign currency. This is an unsavoury prospect.
The economy cannot afford a reversal to dollarisation witnessed in the nineties. Therefore, both the fiscal and monetary managers must keep this in view at the time of policy making.
It is claimed that forex inflows surge up just before the two Eids and winter holidays due to visiting expat Pakistanis. The outflows are up during the favoured months for Umra, Ramazan and Rabi-ul-Awal pilgrimage and when companies close their yearly accounts ie June. Now the cash dollars surrendered to SBP by banks can be made available to money changers/exchange companies.
They may not cover a large part of the demand but could meet at least 10-20 percent of the requirement. Yet it would be a good move that should provide a more accurate data of forex flows, to the Central Bank.