Ayesha Saba

Strict enforcement of relevant rules and regulations is needed to prevent unauthorised foreign exchange transactions to ensure inflows through the official channels and safeguard remittances. Key actions should include offering competitive exchange rates, enhancing the number of digital platforms, providing incentives for legal remittances, and enforcing stringent regulations against illegal transactions. Speaking to WealthPK, Dr Sajid Amin, noted economist and Deputy Executive Director of Sustainable Development Policy Institute (SDPI), said the current account, remittances and foreign direct investment are the three primary instruments that influence the fluctuations in foreign exchange reserves. “The illicit inflow of remittances adversely affects the country's current account. This phenomenon contributes to a widening current account deficit, thereby exacerbating the country's economic challenges.”

He added: “By offering attractive schemes, such as lower transaction fees, better exchange rates, and rewards for frequent remitters, the government and financial institutions can encourage the use of official channels.” Amin said that though the State Bank of Pakistan has implemented strict measures to improve transaction methods, there remains a gap to be bridged. “In remote areas, it is more challenging to use authorised channels for remittances compared to unauthorised ones, because the unauthorised channels work faster than the official channels. Regulatory bodies need to implement rigorous checks and balances to monitor and curb unauthorised foreign exchange transactions. Without stringent enforcement, even the best policies can fail. It is essential to create a deterrent against illegal trading to uphold the integrity of the financial system,” he said. The SDPI deputy executive director also emphasised the importance of maintaining a competitive exchange rate to curb the appeal of the grey market.

He explained that when there is a significant disparity between the official exchange rate and the rate offered through grey channels, individuals and businesses are incentivised to use unofficial channels for better deals. He added that a more flexible exchange rate policy, which better reflects market conditions, could narrow this gap and reduce the appeal of illegal channels. He suggested that the price of dollar should not be lowered forcibly. Amin said the government should stop the influence of speculators to tackle the current account deficit issue.   The SBP’s foreign exchange reserves increased by $51 million to $9.153 billion during the week ended August 2. The SBP reported that the country’s total foreign exchange reserves increased to $14.472bn, including $5.318bn held by the commercial banks. The financial market expects the SBP’s reserves to reach up to $13bn at the end of 2025 with fresh IMF inflows under a new long-term loan programme.

Credit: INP-WealthPk