ISLAMABAD, 28 June 2004 — The rupee is sliding down. Dollar is moving up. It is encouraging overseas Pakistanis to switch back from banks to ‘hawala’ or ‘ hundi’. The question now is: When will the rupee’s slide stop?
Bankers foresee some more turbulence. But, at what point will the dollar-rupee parity settle? July holds the key to the future trend.
By the weekend, dollar in interbank market rose to Rs. 58.11, losing 1.1 percent in value in eight weeks. The greenback rose in kerb to Rs. 58.58, also losing Rs. 0.55 in eight weeks. “As kerb rates are looking up, overseas Pakistanis appear switching back to ‘hawala’ or ‘hundi,’” central bankers and officials in commercial banks say. Surging imports and widening balance of payments have created a bigger demand for dollars over the last three months. The demand for dollars also rose because the government had to repay foreign debt, and multinationals were also in the market for dollars in order to repay their year-end foreign liabilities or transmit dividends in June. As dollar in interbank and kerb market rose against the rupee, the premium in the kerb also increased.
The overseas Pakistanis, especially those working in the Gulf, Middle East and North America, and the rate of exchange they get through ‘hawala’ or hundi,’ will also determine the volume of future dollar inflow through banks or unofficial channels. But, State Bank of Pakistan (SBP), the central bank, is already monitoring the kerb and interbank markets closely, to ensure larger — and clean — inflow through banks.
It has, for instance, now enforced strict, “anti-money-laundering” regulations. The regulations will not apply to normal home remittances sent by overseas Pakistanis, but they may create an apprehension that their money may be held up, or delayed merely on suspicion. SBP will have to ensure that genuine remittances are delivered promptly, and without any hassle.
The Banking Policy Department of SBP in its Circular BPD-20, sent to all banks and development finance institutions, has strengthened the Anti-Money Laundering Regulations (AMLRs) already in force. The AMLRs cover regular customers, walk-in customers, correspondent banks, transactions’ record, and secrecy. AMLRs lay down:
• It’s mandatory for all banks to provide to SBP, details of all “suspect bank accounts” including title, type and number of account(s), amounts involved, details of transactions, reasons for suspicion and nature of the underlying criminal activity, the bank suspects.
• Verification of identity of walk-in customers, conducting transactions above an “appropriate limit to be prescribed by the banks themselves.”
• Necessary record for all domestic and international transactions should be prepared and supplied to SBP or law enforcement agencies for investigation or evidence in legal proceedings.
• Identification documents like passports, identity cards, driving licenses, account files, etc. should be retained for five years when business relations with customer ends, in case of “suspicious transactions.”
• Banks should have the fullest information about correspondent banks, including Know Your Customer (KYC) Policy, management & ownership, business activities, location, money laundering prevention and detection measures.
• Identity of any third-party that will use the correspondent banking services like payable through accounts, and condition of bank regulations and supervision in the correspondent’s country.
• Correspondent relationship should be established only with such foreign banks that have an effective acceptance and KYC policies.
• Special attention should be paid to all “complex, unusually large transactions, and all unusual patterns of transactions that have no apparent economic or visible lawful purpose.”
• If banks suspect or have reasonable ground that funds are the proceeds of “a criminal activity” it should be promptly reported to SBP.
• The bank employees are strictly prohibited to disclose to anyone that a suspicious transaction is under investigation.
• Proper screening and integrity of bank employees should be ensured while hiring.
Earlier anti-money laundering measures, in force for months, did not adversely affect remittances. Pakistan received $3.516 billion remittances in the first eleven months — up to May — of current fiscal 2004. SBP says the year will end June 30 with a total of $3.6 billion. But, indications are the total may even rise to $3.8 to 4.0 billion. The total was $4.06 billion in 2003.
The rupee fell to Rs. 57.69 at the end of May from Rs. 57.47 at the end of April, and further to Rs. 57.95 on June 17 — a loss of 0.8 percent in six weeks. It again fell to Rs. 58.02 June 22, as banks continued to buy large amounts of dollars for customers for payments abroad. The rupee came down Rs. 0.55 or 1.0 percent in value in two months. It is in contrast to rupee’s gain of Rs. 0.34 or 0.6 percent in the first nine months of 2004.
SPB did sell dollars into the interbank market to shore up the rupee, but this did not succeed. A reduced inflow of home remittances and enlargement of the trade deficit in the first 11 months of 2004 to $2.674 billion, up from $1.1666 billion in the like period of 2003, is the key cause of weakening of the rupee.
Transactions through ‘hawala’ or ‘hundi’ and the kerb market have been attractive for weeks, as forex demand stayed high, and the spread between the interbank and the kerb rates widened, ranging Rs. 0.40 to 0.60 a dollar.
Overseas Pakistanis remittances through banks, in the first 11 months of 2004 — up to May 31, at $3.473 billion were $231 million — or 6.2 percent less than $3.704 billion received in the same period of 2003. Remittances from Saudi Arabia, Kuwait, Japan and US also declined. But, the decline from UAE alone was 29 percent at $224 million. Bankers and exchange company officials attribute the decline to expatriates going back to use of ‘hawala’ and ‘hundi’ because of their better rate than the banks. However, remittances from Bahrain, Canada, Germany, Norway, Oman, Qatar, and UK rose in this period.
In order to regulate the kerb market and the money changers more closely, SBP warns that 378 licensed money changers across Pakistan will cease to operate from June 30. Big money changers already have converted themselves into Exchange Companies (ECs) under SBP regulations. SBP has offered the remaining money changers either to become franchisees of those ECs or seek the central bank’s license to function as ‘B’ Category Exchange Companies (BECs). A BEC will only buy and sell foreign currency notes and coins, but will not be allowed to transmit money in any form, which ECs can. A BEC should have a paid up capital of Rs. 20 million, 10 percent of which will be deposited with SBP, under the Reserve Requirement.
The rupee, in the remaining days of June and July, may fall further against the dollar and other major currencies because of a mismatch in supply and demand. The current and foreseeable inflow are falling short of outflow, according to Pakistani and foreign bankers. SBP officials also feel the dollar may rise 0.5 percent by June 30.