Circulars/Notifications - Exchange Policy Department  
 F.E. Circular No. 08
May 18, 1999 

All Authorised Dealers
in Foreign Exchange,

Dear Sirs,

ADOPTION OF MARKET BASED UNIFIED EXCHANGE RATE

1. THE PRESENT EXCHANGE RATE SYSTEM

Attention of the Authorized Dealers in invited to F.E.Circular No. 38 dated the 21st July, 1998 as amended and amplified through various F.E.Circulars and Circular letters. These circulars contain instruction for implementing a multiple exchange rate system. Under the system, the exchange market consists of the Official exchange ate (of Rs 46 per U.S. dollar), the "Floating Inter-bank" exchange rate (FIBR) (which varied depending on the market conditions) and the "Composite" rate, which represents the weighted average rate for those transactions that were effected with a mixture of foreign exchange acquired at the "Official" rate and "Floating Inter-bank" rate. Under the system, all foreign exchange earnings are required to be repatriated and sold to the Authorized Dealers. However, only 5% of all foreign exchange receipts are surrendered by the Authorized Dealers to the State Bank at the "Official" exchange rate. The rest of the receipts are sold in the inter-bank market at the market determined "Floating Inter-bank" rate. On the payment side, imports of wheat and specified POL products are effected at the "Official" exchange rate. For all other transactions, only 5% of the needed foreign exchange is provided by the State Bank at the "Official" exchange rate. The remaining 95% is purchased from the inter-bank market at the "Floating Inter-bank" rate.

2. INTRODUCTION OF A UNITARY RATE SYSTEM

It has been decided to replace the above system by a market based unified exchange rate system with effect from May 19, 1999. For the purpose, the "Official" exchange rate has been abolished and the "Floating Inter-bank" rate shall apply to all foreign exchange receipts and payments both in public and in private sectors. Thus, effective from the above date, the country has adopted a market-based unitary exchange rate system.

3. ABOLITION OF SURRENDER REQUIREMENTS

The requirement that all foreign exchange earnings, including export proceeds, be repatriated the country in a timely manner will remain unchanged. Accordingly, instructions laid down in the Foreign Exchange Manual for repatriation of foreign exchange and its sale to the Authorized Dealers should continue to be followed. The Authorized Dealers will, however, not be required to surrender such foreign exchange to the State Bank, Similarly, all requests from customers for purchase of foreign exchange for all approved purposes (including imports, invisible, debt repayment etc.) will be met by the Authorized Dealers from the inter-bank market, subject to the rules and regulations laid down in the Foreign Exchange Manual, and other instructions issued from time to time.

4. SPREAD BETWEEN BUYING AND SELLING RATES AND RATE FOR DISCOUNTING OF EXPORT BILLS.

While each Authorized Dealer is free to fix its own buying and selling rates, the spread between the spot buying and selling rate should not exceed Rs. 0/50 per U.S.dollar. The margin prescribed vide paragraph 4 of F.E.Circular No. 5 of 1998, for determination of the exchange rate applicable on discounting of export bills is, however, withdrawn.

5. SALE AND PURCHASE BY THE STATE BANK

With the coming into force of the new arrangement, all foreign exchange requirements shall be met from foreign exchange receipts in the inter-bank market. The Authorized Dealers would neither approach the State Bank for release of foreign exchange for any purpose, nor would they have to surrender it to the State Bank. However, the State bank can, and will, intervene in the market for the ale and purchase of Foreign exchange on its own account at rates and timing of its choosing.

6. INTER-BANK TRANSACTIONS

In order to allow Authorized Dealers to freely trade in foreign currencies in the domestic market, the existing para 9 of chapter V of the Foreign Exchange Manual is amended to read as under:

 

"Inter-bank transactions

 

Authorized Dealers may freely buy and sell foreign currencies from and to other Authorized Dealers in Pakistan provided their net position and Nostro balances at the end of the day remain within the limits prescribed for them from time to time".

7. FORWARD CONTRACTS

  1. Effective immediately, the State Bank will not provide forward cover to Authorized Dealers. The State Bank will, however, honour the commitments already made in respect of forward purchases and sales at the "Official" exchange rate by taking/making deliveries at the contracted rates.

  2. Authorized Dealers may provide forward cover for exports. Imports and other permitted transactions for any duration, in accordance with the conditions prevailing in the market. Each Authorized Dealer is free to determine the conditions for deliveries, close out etc. The State Bank will, however, encourage the Authorized Dealers to adopt common rules in this regard.

  3. The existing instructions in respect of forward cover on foreign currency deposits (excluding FE 25 deposits) remain unchanged. The rate of exchange for the purpose of forward cover will be in the average of the closing Inter-bank buying rate for the previous working day, as displayed on SBP Reuter pages.

8. CONVERSION OF FCA AND DBC/FCBS AND SPECIAL U.S.DOLLAR BONDS

Withdrawals in rupees from foreign currency accounts will henceforth be made at the rates as mentioned in paragraph 7(iii). Encashment in rupees of DBCs, FCBCs and Special U.S.Dollar Bonds, and of profits thereon, will also be made of these rates.

9. OTHER INSTRUCTIONS

All other existing instructions remain unchanged. Your attention in invited in particular to the following :

  1. Repatriation to Authorized Dealers in Pakistan of full export proceeds as prescribed vide SBP Notification no. FE 1/98-SB dated the 8th June, 1998.

  2. Permission to exporters and importers to sell/buy, both ready and forward, from any Authorized Dealer.

  3. Retention of export proceeds in special Exporters Account for a period upto seven workings as, only for the purpose of sale to an Authorized Dealer.

  4. Obersvation of "Open Position" and "Nostro" limits.

  5. Display of rates by all branches of Authorized Dealers.

  6. Submission of returns of all foreign exchange transactions. A new reporting system on daily basis is being introduced separately.

       
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