The latest order from the State Bank of Pakistan requiring exchange companies to publish to the Foreign Exchange Companies’ Association their day-end closing buying and selling rates for six major currencies needs to strengthen open market transparency and governance in the foreign exchange market. In order to provide a more “robust, reliable determination” of the exchange rate, the biggest exchange companies—which together hold a 75 percent market share—will now be obliged to share this data with the association at the end of each day. The action is a component of the September-initiated FX market reforms, which aim to restrict unlawful dollar trade and outflow, lower volatility, and strengthen regulatory oversight of open market activities. The bank has already ordered the major banks to “establish their wholly owned exchange companies to cater to the legitimate foreign exchange needs of the general public to foster efficiency,” and it has given smaller exchange companies three months to become fully fledged forex firms. Additionally, the bank has mandated that all firms increase their capital by the current minimum requirement of Rs200m to Rs500m, excluding losses, by the end of December. Following the government’s adoption of a market-determined exchange rate and agreement with the IMF to a maximum difference of 1.25 percent between the interbank and open market exchange rates over any five consecutive working days, tighter controls over the foreign exchange market and consolidation of smaller firms in the ‘B’ category engaged in the sale and purchase of foreign currencies only had become inevitable in the wake of the rapid currency depreciation. A number of issues were brought up, including the rapid depletion of SBP reserves, significant illicit dollar outflows, and the weak operating framework and low compliance levels in the currency market that had caused the rupee to drop to an all-time low. The government should take strict measures to control under-invoicing of imports in order to increase dollar inflows through remittances, even though the reforms are essential for the stability of the currency rate. The market cannot be completely healed by treating one symptom while ignoring others.
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