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Exchange control

The restrictions imposed by the government of a country on conversion of its currency for another, with the purpose to improve its balance of payments position is called exchange control.

Exchange position

Foreign exchange position is the balances of bank foreign exchange assets and liabilities that generate the risk of obtaining additional revenues or expenditures upon the modification of exchange rates.

Foreign Exchange

Any currency other than the local currency which is used in settling international transactions can be termed as foreign exchange. This includes, instruments, such as, draft, cheques etc. and paper currency, used to make payments between countries.

Foreign exchange contract

It is a commitment to buy or sell a specified amount of foreign currency on a fixed date and rate of exchange. Such contracts are used by the importers as a hedge against exchange rate fluctuations.

Foreign exchange earning

It includes, proceeds from the export of goods and services of a country, and the returns from foreign investments, denominated in convertible currencies.

Foreign Exchange Market

The foreign exchange market deals in trading currencies. The purpose of the foreign exchange market is to help international trade and investment. It helps businesses convert one currency to another. For example, it permits a Pakistani businessman to import European goods and pay Euros, even though the businesss income is in Pak rupees. 

The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover is over US$3.00 trillion. Central banks 

play an important role in the foreign exchange markets.

Foreign exchange rate

This is the conversion rate of one currency into another. This rate depends on the local demand for foreign currencies and their local supply, countrys trade balance, strength of its economy, and other such factors. Exchange rates can be fixed or floating.

Fixed rates is the system in which the value of a countrys currency, in relation to the value of other currencies, is maintained at a fixed conversion rate through government intervention.

Floating rate is a system in which a currencys value is determined by the interchange of the market forces of demand and supply, instead of by government intervention. However, all central banks  try to control these rates within a certain range by buying or selling their countrys currency as the situation warrants.

Terms used in money market

Annualized

Extrapolates the behavior of an element (such as volatility) from a certain time period to a full year.

Ask

The price at which sellers offer currencies to buyers.

Base currency

Usually the currency of the home market in which a trader or investor is buying or selling.

Bid

The price at which buyer offers to buy currencies from sellers.

Currency pair

Exchange rate relationship between two currencies, where one currency is expressed in terms of the other. For example, USD-EUR (US dollar against Euro) is a currency pair.

Dollar rate

The exchange rate of a foreign currency as quoted against the US dollar (USD). Some currencies are typically only quoted against the US dollar, such as the Arab Emirates Dirham (AED) Pak Rupees (PKR). The exchange rate of the Arab Emirates dirham and PKR will be thus computed from AED-USD and PKR-USD.

Exchange rate

The number of one currency needed to buy another.

Exchange rate risk

The potential loss that could be incurred from a movement in bid/ask prices, or exchange rates. For traders, risk is measured by the open currency position.

Exposure

The risk which an investor accepts when buying and selling in foreign currency-hedged financial instruments.

Filtering data

Some data may be "bad," stemming from such causes as a market maker incorrectly typing a price, or entering the correct price but in the wrong format. All data used by OANDA is filtered using its own sophisticated algorithms.

Financial institution

An organization primarily established to offer and perform financial services. 

Examples of financial institutions include brokerages and banks.

Forecast

A statistical analysis of the markets whereby a percentage chance is assigned to a given price movement occurring. A forecast of the foreign exchange markets is similar to a weather report in that both assign a 

probability to the occurrence of an identified market or climatic change. 

FX or Forex

An abbreviation for foreign exchange.

Hedging

A transaction strategy used by traders and investors in foreign exchange to protect an investment or portfolio against currency price fluctuations. A current sale or purchase is offset by contracting to purchase or sell at a specified future date in order to defer a profit or loss on the current sale 

or purchase. In this way risk is offset due to currency price fluction.

Interbank prices

Currency prices that reflect market rates among financial institutions for transactions typically over US $1 million. Interbank prices are different from retail prices.

ISO

The International Standards Organization, a worldwide standard-setting 

body. We use ISO 4217 currency codes in all of our services.

Long position

A market position where a trader has bought a currency he previously did not own. A long position is normally expressed in terms of the base currency.

Market maker

A financial institution or individual making consistent buy and sell quotations

in selected currencies. A market maker must hold or have ready access to the amounts quoted, that is carry an inventory.

Overbought

Situation where price movement has risen 150% faster or stronger than normal, rising too far in response to net buying. A price movement that becomes overbought is expected to soon make a corrective move. In other 

words, the price of the currency pair is expected to fall soon.

Oversold

Situation where price movement has fallen 150% faster or stronger than normal, declining too far in response to net selling. A price movement that becomes oversold is expected to soon make a corrective move. In other 

words, the price of the currency pair is expected to soon rise.

Portfolio

A selection of securities held by an investor or financial institution. Portfolios are designed primarily to spread investment risk.

Price / basis point, or pip

One basis point = one paisa (0.01)

Price movement

The change in the price of a currency over a specified time period.

Retail prices

Currency prices which reflect commissions and special charges that a bank or exchange agency demands to convert currencies for no corporate customers. These commissions and special charges vary among countries, banks, and exchange agencies. 

Risk

The potential loss that an investor accepts when he makes an investment. Risk can also be defined statistically as the annualized standard deviation of returns. See exchange rate risk.

Short position

A market position where a trader has sold a currency he does not previously own. A short position is normally expressed in terms of the base currency.

Spread

The difference between the bid and the asking price of a currency.

Stop-buy

A buy order for a currency price that is above the current "market," or current price, that becomes a market order when the specified price is reached. Stop-buys are used by traders to establish positions in markets which they perceive to be rising in value.

Stop-loss

A price specified by a trader at which he closes his position ,buys or sells currencies to exit the market, to ensure that in case of a loss he is able to keep his loss in line with his risk profile.

Time horizon 

The period of time over which a forecast of the foreign exchange markets is made. Traders generally look at forecasts over several time horizons before making a trading decision. Typical time horizons presently used in financial services are:

• one day (24 hours) 

• five days 

• three weeks 

• three months 

Vendor or supplier

An financial organization which collects, packages, and distributes up-to-

the-minute price quotes from banks and other financial institutions.

Volatility

A measure by which an exchange rate is expected to fluctuate or has fluctuated over a given period. Volatility figures are often expressed as a percentage per annum.

Opening of Foreign Currency Accounts

Accounts other than Pak Rupees are Foreign Currency accounts. Foreign currency account can be opened only in those branches that have been permitted by SBP to deal in Foreign Exchange. Rules related to foreign currencies are given in SBP’s Foreign Exchange Manual chapter VI. Prudential regulation M-1 to M-5 and all CDD/KYC and AML rules and regulations applicable to Pak rupees accounts are also applicable to Foreign Currency accounts. Further procedure for opening the account and documentation required for different type of accounts are same, that a Pak rupee accounts.

For accounts opened against special permission, in addition to normal documentation SBP approval shall also be made part of documentation 

According to the SBP Foreign Exchange Manual, (chapter VI) following private foreign currency accounts can be opened without prior approval from SBP:

1. Pakistani national resident in or outside Pakistan, including those 

having dual nationality.

2. All foreign nationals residing abroad or in Pakistan.

3. Joint account with resident and non-resident

4. All diplomatic missions and their diplomatic officers.

5. All international organizations in Pakistan.

6. Companies established in Pakistan including foreign share holdings

Charity trust, foundations etc. which are exempted from Income Tax.

8. Branches of foreign firms and companies in Pakistan.

9. Non resident Exchange Companies even if owned by a bank or financial 

institution.

10. All foreign firms, corporations, other than the banks and financial 

institutions owned by the banks, incorporated and operating abroad, 

provided these are owned by persons who are otherwise eligible to 

open foreign currency accounts. 

Foreign Currency accounts whose general permission is given in above cases; should not be fed by:

1. Foreign Exchange borrowed under any general or specific permission 

given by SBP, unless permitted.

2. Any payment for goods exported from Pakistan.

3. Proceeds of securities issued or sold to non residents.

4. Any payment received for service rendered in or from Pakistan.

5. Earning of profit of the overseas offices or branches of Pakistani firms 

and companies including banks,

6. Investment of resident Pakistani abroad.

7. Any foreign exchange purchased from an authorized dealer in Pakistan

for any purpose.

Corporate or legal bodies can not generate funds from the kerb market for deposit in their foreign currency accounts. Foreign currency accounts can be fed by:

A. Remittance from abroad.

B. Travelers cheques issued outside Pakistan (whether in the name of 

foreign currency account holder or any other person).

C. Foreign currency notes.

D. Foreign exchange generated by encashment of securities issued by 

government of Pakistan.

The above accounts are freed from all foreign exchange restrictions except foreign currency account existing as on 28 May 1998 and restrictions were issued vide FE circular No12 of 1998. Accounts covered under FE 12 are transferable from one bank to other. The main points of FE  circular No12 of 1998 were:

I. Withdrawals in foreign currencies from the then existing foreign currency 

accounts – whether maintained by the resident or nonresidents were 

temporarily suspended.

II. Withdrawals were allowed in Pakistan rupees if so desired by the 

account-holders. Payments in such cases could be made at the rate 

of Rs. 46 per dollar and for other currencies, at the rate crossed with 

New Yorks closing mid-rate for the previous working day.

The facility of foreign currency account is NOT available to the following:

a. Airlines. Shipping companies operating in / through Pakistan or collecting 

passage, freight in Pakistan.

b. Investment banks.

c. Leasing companies/ Modarba companies including those which have 

been granted permission to deal in foreign exchange.

Special Foreign Currency (FC) Accounts for Private Power projects

Banks & DFIs can open special Foreign Currency accounts for private power projects in Pakistan against special permission from SBP. This special permission shall be available as per agreement entered by these companies with Private power and infrastructure board (PPIB) Government of Pakistan. The account will be allowed to maintained, during construction and operation of the project for the following purposes:

1. FC Account in or outside Pakistan for deposit of foreign equity and FC 

loan.

2. FC insurance account for payment of insurance premium and receiving 

insurance claims.

3. Offshore FC control account as per conditions of the agreement signed

with PPIB for operating the project.

4. Offshore FC operating account for meeting operation & maintenance 

of the project.

5. Offshore FC account for meeting disputed payments with the condition 

that the balance will be remitted to Pakistan once dispute is over.

6. Offshore FC account for debt service/ payment.

7. Offshore debt service reserve account, with the condition that the 

maximum balance in this account would not exceed next 12 months 

debt service payment.

8. Offshore FC account for maintenance of reserve, with the condition 

that, permission will expire with the expiry of the agreement and 

account will hold maximum US $ three millions at a time.

9. Offshore FC account for remittance of dividend.

Special permission for foreign currency accounts

SBP on request in writing may issue special permission for opening FC account to the following:

1. Foreign mineral/ oil exploration companies, foreign contractors and 

their sub contractors, subject o the condition that they will meet all 

their expenditure in Pakistan, including salaries of foreign nationals 

in pak rupees, even if it is received from their head office, an the 

conversion shall be on interbank market rates.

2. Firms and companies raising foreign equity or foreign currency loan, 

for receiving and retaining foreign funds. These funds can be used as 

per terms of SBPO FE Manual e.g. imports, consultancy and which 

are related to the business for which account is opened.

Authorized banks / DFIs must submit monthly statement in prescribed format (appendix V-5) along with related documents (import documents, invoices, agreement etc).

Surrender of Foreign Exchange

All citizens of Pakistan and other persons residing in Pakistan continuously for six months or more and posses’ foreign exchange whether in Pakistan or abroad are required to sell such foreign exchange to authorized banks within three months from the date of its acquisition except:

I. Foreign Exchange held abroad by Foreign Diplomats, foreign nationals 

employed by embassies, missions of foreign countries.

II. Foreign exchange held by Foreign National & foreign business houses 

except that foreign exchange which represents business conducted 

in Pakistan or services rendered while in Pakistan. 

III. Foreign exchange held by resident in Pakistan in countries other than 

India, Bangladesh, Afghanistan and Israel provided amount in these 

accounts does not exceed US dollar 1000 or equivalent in that currency.

IV. Afghan currency whether held in Pakistan or outside Pakistan.

V. Foreign national are not allowed to make payment on behalf of Pakistani 

or foreign national residing in Pakistan against pak rupees. This

includes foreign currency accounts maintained by foreign national in 

Pakistan.

Other important points

• Pakistani nationals resident in Pakistan are  allowed to open and 

maintain F C account outside Pakistan except in Afghanistan, India, 

Bangladesh and Israel, provided the balance maintained in these 

accounts should not exceed US $ 1000 or equivalent.

• Interest paid by the banks to the foreign currency account holders 

shall be reported as sale on the monthly exchange return

F.E. 25 Schemes

Amount of Foreign Exchange accepted out side SBP forward cover scheme i.e. under the provision of SBP F.E. Circular No.25 of 1998 Foreign Exchange is not required to be surrendered to SBP. The banks that accepted such deposits are free to lend, invest money in or outside Pakistan on the rates of currency not exceeding LIBOR (London Interbank Offer Rate) of such date. Main features of the scheme are:

Foreign currency deposits, mobilized under FE 25 Scheme, after netting-off deposits utilized to finance trade relate activities, such as financing against import and export, should not at any point exceed twenty percent (20%) of the local currency deposits of the bank / DFIs at the close of business of the last working day of the preceding quarter. In 2004 SBP has made certain changes in the policy of settlement of FE -25 Loans for Export vide FE circular No16 of 2004, which says that “FE-25 loans against intended exports shall only be settled through realization of export proceeds or remittance from abroad, of FE-25 Loans for Export maturing after Nov 2nd 2000.

Import financing against import bills under FE-25 Scheme can be allowed from the date of import payment by creating foreign currency loan against importer for a maximum period of six months. The repayment can be made by purchasing foreign currency from interbank market on prevailing rate on the date of repayment. The banks can purchase foreign currency from interbank market to cover interest amount and the same should be reported to SBP by submitting “M” form along with monthly foreign exchange returns.

Cash flow position

There is said to be a position if circumstances are such that a change in a rate will create a profit or loss. If cash inflows and cash outflows are unequal or have mismatched value dates, there is a net cash flow position. 

Separate net cash flow positions apply for each value date.

  Net cash flow position = cash Inflow - cash Outflow

A positive net cash flow position reflects an excess of cash inflow, over cash outflow, on the relevant value date. The surplus cash will be available for investment. If interest rates rise the return will be higher. If interest rates 

fall, the return will be lower.

A negative net cash flow position reflects an excess of cash outflow over cash inflow on the relevant value date. Assuming there are no idle balances, the account will become overdrawn. The shortfall of cash will require funding. If interest rates rise it will become more expensive to fund the account. If 

interest rates fall it will become less expensive to fund the account.

A negative net cash flow position also implies a liquidity position. There is a risk that there will be insufficient funds available for borrowing, in which case the account must remain overdrawn. Being overdrawn may involve 

financial and non-financial penalties.

If cash inflow equals cash outflow on a particular value date, then the net cash flow position is zero. This is referred to as a square cash flow position. 

Changes in interest rates will have no net impact on profits or losses.

Exchange position

Foreign exchange position is the balances of bank foreign exchange assets and liabilities that generate the risk of obtaining additional revenues or expenditures upon the modification of exchange rates. A positive Net position reflects an excess of inflow, over outflow, on the relevant value date. The surplus will be available for investment. If interest rates rise the return will be higher. If interest rates fall, the return will be lower.

A negative Net F C position reflects an excess of outflow over inflow on the relevant value date. If there are no idle balances, the account will become overdrawn. The shortfall will require funding. If interest rates rise it will become more expensive to fund the account. If interest rates fall it will become less expensive to fund the account.

Net Exchange Position

In Pakistani money market it is recommended that banks should keep their

exchange position square, neither over bought nor over sold. If the amount of foreign currency purchased equals the amount of that currency that has been sold, then the net exchange position will be zero. This is called as a square exchange position.

Buying and selling foreign currencies creates exposure to changes in exchange rates. Buying a foreign currency creates an asset. The position is said to be long the foreign currency. If the foreign currency appreciates there will be an exchange gain. If the currency depreciates there will be an exchange loss.

Selling a foreign currency creates a liability. The position is said to be short the foreign currency. If the foreign currency depreciates there will be an exchange gain. If the foreign currency appreciates there will be an exchange loss.

The excess amount of a foreign currency which has been purchased over the amount of the same foreign currency which has been sold is described as the net exchange position. There is a separate net exchange position for each foreign currency. 

Net exchange position = foreign currency purchased - foreign currency sold

Being long a currency implies having a net exchange position which is positive. Provided the exchange rate is quoted with the foreign currency as the base currency, a rise in the exchange rate will yield an exchange gain and a fall in the exchange rate will result in an exchange loss.

Being short a currency implies having a net exchange position which is negative. Provided the foreign currency is the base currency, a rise in the exchange rate will result in an exchange loss, and a fall in the exchange rate will cause an exchange gain. 

If the amount of foreign currency purchased equals the amount of that currency that has been sold, then the net exchange position will be zero. This is referred to as a square exchange position. Changes in exchange rates will have no impact on profit or loss.

A net exchange position is created or removed at the time the purchase or sale of foreign currency is contracted, not at the time when the related cash flows occur. For example, if a spot contract is entered  today to purchase USD 1 million against JPY at a rate of USD 1 = 120.50, the buyer immediately becomes long USD and short JPY regardless of the fact that he or she will not receive the USD or pay away the JPY until two business days hence. Similarly, forward purchases or sales of foreign currency 

immediately create, or remove a net exchange position. 

Distinction between Net Exchange Position and Net Cash Flow Position

It is important to appreciate the distinction between a net exchange position, and a net cash flow position. Money market transactions create net cash

flow positions, but do not create net exchange positions. Only buying or selling a currency can create a net exchange position - merely borrowing or lending a foreign currency does not.

Borrowing CHF for three months will cause a positive cash flow of Swiss Francs now and a negative cash flow of CHF in three months time, but no exposure to the exchange rate. Unless the CHF are sold (which create a net exchange position), they will be available to repay the loan on maturity and so exchange rate changes will have no effect on profit or loss.

Foreign exchange transactions create both net cash flows positions and net exchange positions. Mismatched cash flows may be offset by either money market transactions or foreign exchange transactions. However, 

net exchange positions can only be offset by foreign exchange transactions. 

Open Foreign Exchange position

The foreign exchange position shall be considered open if foreign exchange assets in a certain foreign currency are not equal to foreign exchange liabilities in the respective foreign currency. The value of the open foreign exchange position represents the difference between the amount of foreign exchange assets in a certain foreign currency and the amount of foreign exchange liabilities in that currency. 

The open foreign exchange position is long if the sum of foreign exchange assets in a certain foreign currency exceeds the sum of foreign exchange liabilities in the respective foreign currency. The open foreign exchange position is short if the sum of foreign exchange liabilities in a certain foreign currency exceeds the sum of foreign exchange assets in the respective foreign currency.

Managing Exchange Risk

Banks dealing in foreign exchange transactions are open to risks from movements in competitors prices, competitors cost of currency/ capital, foreign and exchange rates and interest rates, all of which need to be perfectly managed. This is called the task of managing exposure to Foreign Exchange movements.

Exchange risk is simple in concept; it is a potential gain or loss that occurs as a result of an exchange rate change. For example, if an individual owns a share in, the British company or deposit in British pound, he or she will lose if the values of the British pound will drops.

Risk is not risk if it is anticipated. In most currencies there are futures or forward exchange contracts whose prices give an indication of where the market expects currencies to go. And these contracts offer the ability to lock in, the anticipated change. So perhaps a better concept of exchange risk is unanticipated exchange rate changes. 

An Exposure can be defined as a Contracted, Projected or Contingent Cash Flow whose size is not certain at the moment. The level depends on

the value of variables such as Foreign Exchange rates and Interest rates. The Risk Management Guidelines should be understood, and slowly implemented so that, the deal results positive benefits to the bank. It is very important for the banks management to be aware of these practices and update their policy. Once it is done, it becomes easier for the Exposure 

Managers at treasury to get along efficiently with their task. 

Determination of risk

The following cash flows/ transactions will be considered for the purpose of exposure management.

• It is advisable for the management to decode a limit for branch 

management, such as Cash Flows above $25,000/- in value will be 

brought to the notice of the Exposure Manager, as soon as they are 

projected. 

• It is the responsibility of the Exposure Manager to ensure that he 

receives the requisite information on exposures from various branches 

of the bank in time (daily activity report). 

These exposures should be analyzed and the following aspects must be studied: 

• Foreign Currency Cash Flows/ Schedules 

• Variability of Cash flows - how certain are the amounts and/ or value 

dates? 

• Inflow-Outflow Mismatches / Gaps 

• Time Mismatches / Gaps 

• Currency Portfolio Mix 

• Floating / Fixed Interest Rate ratio 

Hedging

Hedging can be defined as “making an investment to reduce the risk of adverse price movements in an asset”. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. An example of a hedge would be if you owned a stock/ currency, then sold a futures contract stating that you will sell your stock/ currency at a set price,

therefore avoiding market fluctuations. 

Perfect hedging 

Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge). A  on an  is that, which eliminates the  on another investment entirely. Perfect hedges are quite rare as most investments carry at least a little unique risk that cannot be hedged. However, an example of a perfect hedge is a  on  that completely offsets a position in the . While perfect hedges eliminate risk, they also greatly reduce or sometimes eliminate the potential for a good.

Risk hedging

Risk hedging is the taking of an offsetting position in related assets so as to profit from relative price movements. For example, an investor might purchase futures contracts on one currency say US dollar and sell futures contracts on Euro in the belief that Euro will become relatively more valuable compared with US Dollar over the life of the contracts.

Short hedging

It is an investment transaction, which is intended to provide protection against a decline in the value of an asset. For example, an investor who holds shares of Exxon chemical and expects the stock to decline may enter into a short hedge by purchasing a put option on Exxon. If Exxon does subsequently decline, the value of the put option should increase. Same is applicable for currencies and commodities.

According to the chapter IV of the SBP foreign exchange manual, Banks and DFIs can enter into forward purchase and sale of foreign currencies against genuine and firm transactions of approved nature.

Forward cover can be provided even if letter of credit has been opened through an other bank or export documents have been handled by an other bank. In that case cover shall be provided on the basis of a certificate indicating that no cover has been provided by the concerned bank or DFI against the transaction.

Bank can provide forward cover for export, import, foreign private loan, and repatriable foreign currency loan within the relevant provisions of SBP manual. No forward cover transaction can be made for period of less than one month.  

Forward purchase of foreign exchange against “Export of Goods” Banks can purchase foreign currencies forward for delivery up to six and half months from the last date of shipment as provided in the contract/ letter of credit. Purchase on consignment basis may be made at any time after shipment has taken place but last date of delivery should not fall after six and half months from the date of shipment

Incase of export of goods to be invoiced in any convertible currency other than US Dollar it is permissible to buy forward cover in term of US dollar. On realization of export proceeds, dollar amount at booked rate will not be delivered but equaling rupee at spot rate will be paid to the exporter.

Forward sale of foreign exchange against “import of goods”.

Authorized branches of banks and DFIs may sell foreign currencies forward to cover import to Pakistan on cash basis under letter of credit or registered contract. The sale contract may be booked any time after opening the letter of credit or registration of contract. A forward sale against Usance bill can 

be made but it will be up to the date of maturity of the bill.

Forward sale facility is not available for:

I. Crude oil and POL products.

II. Import by federal / provincial government, corporations. department 

with majority govt holding, other than TCP and those public sector 

companies who export some part of their products

III. Sale of foreign exchange to overseas banks branches and 

correspondents to cover rupees bills negotiated by them under letter 

of credit. 

SBP Forward cover Scheme

Under the SBP forward cover scheme, the banks and DFIs can fix their own rate of interest on F C term deposits ranging from 3 months, to 3 years provided these rates do not exceed to average bid rates provided by the British bankers association (BBA) for different currencies on previous working day plus margin prescribed by SBP.

Under this scheme SBP provides foreign currency on future date on a rate agreed today. This provides help to the importers in calculating correct cost of goods to be imported. SBP provides forward cover on deposits and interest in multiple of US $ 1000, GBP 1000, Euro 1000 and Japnani Yen 250, 000. Fee is payable on full amount of forward cover. The maximum rates for payment of interest allowed by SBP are daily published by Foreign Exchange Rates committee.

Other important points

• Banks and DFIs can freely enter into forward transactions, with each 

other provided their exposure remains within prescribed limit

• To cover transactions of their customers, dealers of the banks can 

enter into forward transaction with their overseas branches/ 

correspondents, in respect of currencies other than US Dollars.

• Banks can provide forward cover to the investment banks, leasing 

companies, and Modarba companies holding restricted authorized 

dealers liscence, in respect of the funds mobilized by them from 

abroad, against issuance of certificate of investment and surrendered 

to State Bank.

• Forward contract can be extended on roll over basis even for less 

than one month, if export proceeds is not realized on due date or 

import bill could not be paid in accordance to the terms of letter of 

credit / registered contract. Such extension would be made by closing 

the original contract and booking a fresh contract at new rate.

• If a Usance export bill against which forward cover is taken is presented 

for negotiation/ discounting during option delivery period, it can be 

treated as delivery against the contract. In all other cases discounting 

will not be treated as delivery and the bill will be discounted at current 

applicable rate and deal will be closed on maturity.

• Forward contract which are not taken up will be closed on maturity. 

Difference with prevailing rate will be recovered or paid to the customer 

as the case may be.

• If in a particular case SBP is not satisfied with the transaction of which 

forward cover has been booked, it may direct bank to cancel the 

forward contract.

Forward cover against Foreign Currency Accounts

Persons maintaining foreign currency account in Pakistan can sell forward balance held in their foreign currency account, to the importers against letter of credit / order registered with the bank. Following procedure shall be adopted:

I. The account holder (seller) and importer should deal under intimation 

to the bank where account is maintained.

II. For smooth conduct of the transaction it is necessary, that the account 

holder and the importer should be from the same bank.

III. The seller will instruct the bank to mark lien on the F C account up to 

the amount of the deal.

IV. The bank will make separate deal with the arrangement with the 

importer for recovery of rupee equaling amount of deal at the rate 

agreed between seller and importer.

V. When the documents will be arrived within validity of the deal, bank 

will debit FC account of the seller, take delivery of the amount from 

SBP; take F C amount in nostro account for settlement of LC documents, 

same as inward remittance and credit rupee account of the seller.

VI. Bank will lodge LC documents in their books at the rate agreed between 

importer and the seller and will retire documents in usual arrangement.

VII. Transaction shall be reported in monthly returns in normal way i.e. 

“Form I schedule E-2.

VIII. In case importer fails to avail the contract, it will be closed; difference 

of rate if any shall be settled on maturity date as other forward sale 

contracts are closed.

Foreign Currency accounts of the banks and sale of foreign currency

The authorized banks are permitted to open and maintain account in all fully convertible currencies with their branches and correspondent abroad. The details of these accounts must be reported to the Director Exchange policy department SBP.

All foreign currency balances of the authorized banks /DFIs shall be at the disposal of SBP all the times. SBP may direct authorized banks to sell ready or forward delivery of foreign currencies held by them to SBP or to any person/ institution SBP may decide.

Exposure Limit and Nostro Limit  

SBP from time to time fixes foreign exchange exposure limit for each bank authorized to deal in foreign exchange. These limits are intended to cover position of all branches in Pakistan of the banks incorporated abroad and all the branches and overseas branches of the bank incorporated in Pakistan. The head office of the banks should ensure that these limits are not 

exceeded. It is advisable that banks maintain square or near square position. These are no “Nostro limits for the balances held abroad.

Exchange exposure position

All authorized banks are required to report to Exchange & debt management department SBP all foreign exchange transactions that create foreign exchange exposure in any currency using the software installed by SBP on each banks computer. A floppy along with following reports duly signed by authorized officer must be submitted to Exchange & debt management department SBP:

a) Deals 

b) Take-ups

c) Canceled deals

d) Adjusting entries

e) Closing balance

Other important points

• There is no restriction on purchase of foreign currency (inward 

remittances) but sale of foreign currencies (outward remittances) can 

be made against SBP approval under powers delegated to authorize 

banks.

• Authorized banks can freely buy and sale foreign exchange from each 

other within permissible exposure limit.

• SBP can buy or sale US dollars with authorized banks in ready and 

forward contract.

Authorized banks can freely purchase foreign currency from each other and from their overseas branches and correspondents both as ready and forward contract.

Foreign remittance can be defined as an act of transferring money from one country to an other. Bank issue remittances on behalf of the customers after receiving value of remittance, related charges and Govt taxes. Remittances payable within country are called “inland remittance. Remittances payable outside the country and received from foreign countries are called “foreign remittances.

Foreign remittances are not only source of funds for the banks but also play a very significant role in enhancing foreign exchange reserves of the country.

A discussion of foreign remittances

Foreign inward remittances have been prominent features of the Pakistan’s economy for many decades. It is often argued that remittances have played a stabilizing role, particularly during the Asian crisis when remittance flows have supported household expenditure and offset the sharp reduction in capital inflows.

Pakistan is a major exporter of manpower, possessing the one of the very high rate of out- migration relative to population many countries. The volume of departing Overseas Pakistani Workers have broadly matched the increase in the domestic labor force over the past 40 years. 

This process reflects a range of factors. Creation of employment has generally not kept pace with the increase in the population. Relatively modest economic growth has also contributed to widening wage differentials with advanced economies.

Pakistan is now one of the world’s largest recipients of foreign remittances in absolute terms, behind India, Mexico and Philippine. Aside from exports of goods, remittances are the largest source of foreign exchange for the Pakistan. It is relatively stable source of foreign exchange compared to foreign direct investment and other private capital flows. Traditionally, a large proportion of our overseas labor force comprised workers in the construction and manufacturing sector. According to an estimation, the proportion of income from abroad as a share of total household income is increasing faster than the income generated locally. Labor force migration is largely a lower and middle class phenomenon in the Pakistan. Income 

from abroad is less important for the higher income decides. 

The positive and negative impact of foreign remittances on the economy

There are different views about remittances affect on economic activities:

1. Some of the negative views about remittances & migration of labor 

can be seen as a financial counterpart to migration, which can offset 

some of the output and other losses that may be associated with the

loss of skilled workers, the so-called “brain drain.” The extent and 

economic impact of the brain drain is itself controversial. Some studies 

have challenge the negative view that migration of highly skilled workers 

is detrimental to those left behind. Further in developing countries like 

Pakistan, India and Bangladesh, where rate of unemployment is very 

high, migration of human resource, effects positively on their economy.

2. Some peoples argue that, emigrant can also result into resource 

transfers. Take example of, Chinese population, it has played a 

significant role in the acceleration of foreign direct investment into 

China in recent years. Other side says that, in fact chines economy 

cannot be compared with others. They have a different political and 

social system; there is consistence in their economic policies, and 

strong capital and economic base. 

3. The economic impact of remittances is depending on the proclivity of 

the remittance and its division between consumption and investment. 

If remittances are used primarily to purchase non-tradable goods, this 

could lead to an appreciation of the exchange rate and deterioration 

in competitiveness. But in fact remittances that are consumed will 

generate positive multiplier effects. The size of this multiplier effect 

depends on whether remittances are received by urban or rural areas. 

If remittances are received in ruler areas, these are used in investment 

rather than consumption.

4. A large portion of the funds received as remittance from abroad are 

used in real-estate. Due to investment in real estate, related industries, 

such as cement, steel rerolling, aluminum industries etc. are also 

flourishing.

5. Local labor force also gets job.

6. Remittance Flows results into stability of Income of lower and middle class.

7. A prominent feature of the Pakistan economy over the last four decades 

has been the relative stability in the Forex resources generation, and 

increase in per capita income. 

From the above discussion we came to the conclusion that, there is no doubt that foreign remittances in the Pakistan are an important source of support, especially for the balance of payments. The volume of foreign remittances send by overseas Pakistani has crossed US dollar 3.5 Billions in the year 2008/ 2009. The remittances have contributed lot in improving balance of payment position of Pakistan.

Further analysis of these factors as important determinants of remittance flows are a topic for future research. Similarly, remittances lead to a growth in the Pakistanis case. After migration of labor, unemployed gets opportunities. Due to the enhanced purchasing power of the families of the overseas Pakistanis, local sale is increased, to meet requirement of the consumption goods, production is increased, and as such, it effects very positively on economic conditions of the country. 

SBP role in enhancing Foreign Remittances 

SBP being regulator plays very important role in broadening foreign exchange

reserves of Pakistan. With a view to encourage overseas Pakistanis and others to use the normal banking channels for home remittances, and to protect the remitters / beneficiaries from any losses that they may incur due to unwarranted delays in receipts of funds in the beneficiaries accounts, 

SBP  has put in place a mechanism, which ensures that : 

i. In case where the beneficiary is maintaining his account at any branch 

at the district headquarters, the amount of remittance shall be credited 

within 48 hours (two working days) of the receipt of funds b the bank.

ii. In case where the beneficiary is maintaining its account at any branch 

at tehsil or sub-divisional town, the remittance must be credited within 

72 hours (3 working days) of the receipt of funds by the bank.

iii. Where the beneficiary is maintaining the account at any branch in a 

village / rural area, the remittance must be credited in the beneficiarys 

account within 96 hours (four working days) of the receipt of funds by 

the bank.

iv. A Complaint and Monitoring Cell has been set up in the State Bank 

and in banks which received complaints of remitters / beneficiaries, 

who have not been remunerated by the banks on account of delays.

v. Where a tendency is noted by the State Bank on the part of any bank, 

either through inspection or on the basis of the pattern of complaints, 

to delay the credit in the beneficiarys account, penalties shall be 

imposed on such banks under the provisions of the Banking Companies 

Ordinance, 1962.

Role of State bank of Pakistan, Banking Services Corporation

(SBP BSC)

State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan has also been bifurcated into two Departments. The operation side comes under the jurisdiction of the SBP, BSC, Bank; the Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department. The business process and role of this Department in the SBP BSC (Bank), Head office is as under:

Exchange Policy Department (EPD), SBP, BSC (BANK), is an important department of the State Bank of Pakistan, Banking Services Corporation (Bank), Head Office Karachi.

The work of the Department is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions, out of which one is looked after by a Joint Director and remaining three by Junior Joint Directors. These Divisions are again divided into eight units, which are headed by Assistant Directors.

State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan was bifurcated into two Departments. The operation side come under the jurisdiction of the SBP, BSC, Bank, and H.O. Karachi and is functioning as a full-fledged Department. The Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department.

The work of the SBP BSC (Banks) is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions. These Divisions are again divided into eight units, which are headed by Assistant Directors.

Exchange Companies with Foreign Entities

The mobilization of home remittances is an important business activity for Exchange Companies (ECs). In this respect, Exchange Companies are expected to exercise utmost prudence in implementation of process involved. However, over a period of time, while reviewing agency arrangements of Exchange Companies, certain structural and operational flows / weaknesses have been identified which could damage Exchange Companies ability to effectively effect and mobilize funds from overseas. In order to facilitate Exchange Companies in their diligence process and bring uniformity & discipline in agency arrangements of exchange companies, following fundamental structure of agency arrangements is designed by SBP but overall responsibility of safeguarding interest of the company and avoidance of all related legal, regulatory and commercial risks would rest with the  exchange company.

Selection of Foreign Entities

I. Only those foreign entities that have effective customer acceptance 

and KYC policies and are effectively supervised by the relevant 

authorities should be selected for agency arrangements.

II. No arrangements should be entered into or continued with a correspondent 

entity incorporated in a jurisdiction in which it has no physical presence 

and which is unaffiliated with a regulated financial group.

III. Particular attention should be paid when continuing relationships with 

entity located in jurisdictions that have poor KYC standards or have 

been identified by Financial Action Task Force as being “non-cooperative” 

in the fight against money laundering.

Essentials of the Agreement 

1. The agreement should be for payment of home remittances in PKR only.

2. All funds against home remittances should be received in advance in 

Exchange Company’s FCY Accounts maintained with banks in Pakistan. 

3. For transactions greater than USD 1,000 the agreement should require 

foreign entity to provide address of senders in addition to his/her name. 

However, address may be substituted with any unique Identification 

Number/ National Identity Number/Customer Identification Number/Date 

& Place of Birth.

4. The agreement should be non exclusive meaning thereby that it should 

not restrict Exchange Company, directly or indirectly,  to offer similar 

competing  services under other arrangements. 

5. The agreement should give ownership rights of all related 

accounting/book-keeping and other record to Exchange Company and 

the same is be maintained for at least five years.

6. The agreement should not contain clauses which give blanket approval 

to foreign entity to assign or transfer their part of the agreement or 

any right or duty thereof, to any third party without prior approval of 

SBP.

7. The agreement should be in compliance with all the regulations, 

instructions, directives, circulars and other communications issued by 

the State Bank and contains provision of incorporating any amendments 

made therein from time to time.

8. The agreement should ensure compliance of prudent practices and 

standard policies related to Internal Controls, Information Technology, 

Anti Money Laundering and Know Your Customer etc.

9. The agreement should not compromise State Bank right to terminate 

the agreement at any time. 

Post-agreement Follow up 

1. The Exchange Companies should continuously monitor market repute 

and financial condition of the foreign entity to ensure that all the time 

during validity of the agreement, foreign entity is capable to meet its 

financial obligations under the agreement.

2. Foreign entity should be made bound to immediately bring into notice 

of the company any change in laws, rules and regulations which may 

effect business arrangements.

3. For any subsequent amendment in the agreement, prior approval of 

SBP should be ensured.

4. Foreign entity should also be required to keep EC updated about any 

change in its network.

SBP role in controlling inward and outward Foreign Remittances

Chapter X of the SBP foreign Exchange manual deals with Inward and outward Foreign Remittances. The salient features of this chapter are given below:

1. Inward Remittances. 

The term inward remittance" means purchase of foreign currencies 

in whatever form and includes not only remittances by M.T., T.T., draft 

etc., but also purchase of travelers cheques, drafts under travelers 

letters of credit, bills of exchange, currency notes and coins etc. Debit

to banks non-resident Rupee accounts also constitutes an inward 

remittance.

2. No Restrictions.  

There is no restriction on receipt of remittances from abroad either in 

foreign currency or by debit to non-resident Rupee accounts of banks 

overseas branches or correspondents. Authorized banks may freely 

purchase T.Ts, M.Ts, drafts, bills etc., expressed and payable in foreign 

currencies or drawn in Rupees on banks non-resident Rupee accounts. 

There is also no objection to their obtaining reimbursement in foreign 

currency from their overseas branches and correspondents in respect 

of Rupee bills and drafts which are purchased by them under letters 

of credit opened by non-resident banks or under other arrangements.  

3. Outward Remittances. 

The term "outward remittance" means sale of foreign exchange in any 

form and includes not only remittances by T.Ts, M.Ts, drafts etc., but 

also sale of traveler’s cheques, travelers’ letters of credit, foreign 

currency notes and coins etc. Outward remittance can be made either 

by sale of foreign exchange or by credit to non-resident Rupee account 

of banks overseas branches or correspondents. 

4. Mode of Remittances. 

Authorized Banks should avoid issuing drafts in cover of outward 

remittances whenever remittance can be made by T.Ts, or M.Ts, etc. 

Where, however, the normal means of transfer is likely to result in 

unnecessary hardship or inconvenience to the remitter, drafts may be 

issued in the name of the beneficiaries of the remittance but such 

drafts should be crossed by the issuing bank as "Account Payee only".  

5. Prescribed Application Forms. 

(i)