Structural reforms by State Bank

Structural reforms by State Bank
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In a significant move by the interim government led by Anwaarul Haq Kakar, to improve the transparency and competitiveness within the foreign exchange sector, State Bank of Pakistan (SBP) has announced a comprehensive set of structural reforms, primarily for curbing the dollar appreciation against the rupee. Economists throughout Pakistan have hailed the attempts by the interim government in order to bridge the gap between interbank and open market rates while aligning with the International Monetary Fund’s (IMF) conditions.

Structural reforms initiated with Strengthening Governance and Compliance

Through these reforms, State Bank of Pakistan aims to strength the governance, internal controls of the exchange market, and compliance culture within the exchange companies’ sector. In pursuit of achieving desired targets, banks have been directed to establish separate entities for dealings in foreign exchange operations.
After the plight of foreign currency capital from Pakistan in the previous 16 months, economists had been vocal for more than a year now that State Bank of Pakistan and other concerned authorities are bound to take stern measures within the financial domain, otherwise State should be ready for severe consequences.

Promoting Transparency in Dollar Exchange

In recent developments, Chief of Army Staff (COAS) General Asim Munir has been quite vocal about Pakistan’s economy and pledged immediate action in the matter. COAS also assured the business community of adopting transparency in dollar exchange and interbank rates.

Transparency in dollar exchange, interbank rates are a major concern for the stake holders in Pakistan. This commitment by the COAS underscores the interim government’s resolve to bring money exchanges under the purview of taxation.

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Crackdown on Currency Hoarding and Smuggling

In the past few months’ dollar appreciation against the Pakistani rupee has been worrisome for the people in power corridors, since reports about currency hoarders and smugglers have emerged on various points. Therefore, apart from structural changes in exchange companies, the interim government along with other state institution have decided to initiate crackdown against hoarders and smugglers throughout Pakistan. This action from the government aims to curb illicit activities that can negatively impact currency stability and financial integrity.

Meeting IMF Conditions

Institutions in Pakistan have realized the importance of structural reforms, especially after the IMF agreement. In order to secure the $3 billion loan in July, Pakistan must make such changes, otherwise entire lending process could be jeopardized and that is fearsome for the government. To avert a financial default on the country’s sovereign debt, IMF has mandated that Pakistani authorities must limit the premium between the local currency’s interbank and open market rates to 1.25%. These structural reforms are a strategic reply to fulfill this condition.

Comprehensive Reforms Plan

It is pertinent to mention that State Bank of Pakistan has directed the leading banks of Pakistan, involved in currency exchange business, to create wholly owned exchange companies which can cater the needs of general public in connection with currency exchange. Through this change, government plans to streamline the currency exchange sector and improve services for the citizens of Pakistan.

Moreover, existing exchange companies as well as their franchises would be consolidated into a single category of exchange companies with a well-defined set of steps. This transformation will reduce the fragmentation within the currency exchange sector.

Structural reforms by State Bank At present minimum capital requirement for the exchange companies is Rs. 200 million, which has been increased to Rs. 500 million. Government intends to strengthen the financial foundations of these companies and increase their ability to meet the needs of their clients effectively.

Transition Process and License Requirements

Structural reforms by State Bank, The State Bank of Pakistan has given clear directions to the exchange companies for reforming their institutions according to the criteria laid down by State Bank within a period of 3 months to become the mainstream Exchange Companies. In case of non-adoption of new criteria, licenses of companies will be cancelled. Moreover, franchisees are encouraged to merge or sell their operations to the franchiser company within a three-month time period.

Structural reforms by State Bank, Experts and stakeholders, have expressed range of opinions regarding these reforms on X (formerly known as Twitter). While some stressed upon the need for clarity in defining the genuine foreign exchange needs whereas some view the regularization of exchange companies as a positive step towards financial sector consolidation.

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