All Authorized Dealers
in Foreign Exchange,

Dear Sirs,

In exercise of the powers conferred on the State Bank under the Foreign Exchange regulation Act - 1947, it has been decided to implement a new foreign exchange rate mechanism, effective from July 22, 1998. There will be a two-tier rate structure on foreign exchange : 1) The Official Exchange Rate; 2) The Floating Interbank Rate.

2. All receipts and payments of foreign exchange will be subject to exchange rates according to the following formula :

Receipts :

Capital Accounts, 100% at Official Exchange rate
All Capital Account receipts excluding Foreign Direct Investment but including aid, loans whose repayment requires clearance from Economic Affairs Division, loans taken for projects as authorised vide chapter XIII of the Foreign Exchange Manual, FE-45 deposit swaps, deposits received after July 1, 1998 in the foreign currency accounts existing as of June 30, 1998 under the old scheme.

Other Receipts: Composite Rate, i.e. 50% at Official Exchange rate, 50% at Floating Interbank rate - includes exports and invisible receipts, including home remittances; Foreign Direct Investment; repatriable and non-repatriable loans obtained in terms of chapter XIX of the manual, portfolio receipts for credit to Special Convertible Rupee Accounts opened by non-residents for the purpose of trading in quoted shares. The 50% amounts purchased at the Official Exchange Rate shall be surrendered by the Authorised Dealers to the State Bank.

Payments :
Essential imports                  100% at Official Exchange rate defined as :
Wheat
Edible Oils
POL products
Pulses
Fertilizer
Pesticides
Pharmaceuticals

Also includes payments of debt and interest payable out of EAD's allocation or against repayment schedules registered with the SBP under suppliers' credits / buyers credit, commercial loans as authorized vide Chapter XIII of the FE Manual.

All Other payments : Composite Rate, i.e. 50% at Official Exchange rate, 50% at Floating Interbank rate. Including imports, repatriable loans, other remittances and invisible Travel, Health and educational expenses.

3. The Official Exchange rate for USD / PKR transactions between customers, ADs and the SBP, will be established by the SBP and communicated to Authorized Dealers. The SBP agrees to buy from and sell to the Authorise Dealers at its Official Buying / Selling rates for approved transactions as specified in paragraph 2. The Official Exchange rates for other currencies will be determined by each bank. The Floating Interbank rate will be a floating rate and will be subject to market forces. Each bank will quote its own rate to its customers and to other Authorised Dealers.

4. Methodology of rate calculation

4.1    100% Official Exchange rate: The Authorised Dealers will buy or sell at the Official rate as published by the SBP. For the purpose, a 0.10% spread will be earned by the Authorised Dealers on all such transactions.

4.2 Composite Rate 50% /50% category: The bank will quote a composite rate to their customers on the 50/50 formula. For instance, if the Authorised Dealers Official selling rate is Rs 46.28 per dollar and the Authorised Dealers Floating Interbank selling rate for customers is Rs 48.18 per dollar, then the composite rate quoted to the client will be Rs 47.23 per dollar.

4.3 A separate circular is being issued for Spot and Forward Official Exchange Rate for US Dollar, as well as the procedure for delivery.

4.4 The surrender of 50% of the receipts in respect of other currencies will be made by the Authorised Dealers in equivalent US Dollars at the concerned currency versus USD Dollar rate used by them on that day. The restriction on surrender of amounts in multiplies of $10,000 is waived.

4.5 The Authorised Dealers will report to the Deposit Accounts Department the amounts of dollars required to be surrendered by them on each business day, along with the total amounts required to be bought by them at the Official Exchange rates. The Authorised Dealers will settle the net payable/receivable amounts to or form the SBP. A proforma of the letter is attached.

5. Export Proceeds

5.1 Export proceeds realized by banks 50% of net export proceeds, after deduction of commission as permitted vide Paragraph 29 (I) & (ii) - Chapter XII of the Foreign Exchange manual, will be surrendered immediately to the SBP. The remainder may be held in Special Exporters’ Accounts for a period of upto 14 calendar days. In case the 14th day falls on a holiday, the subsequent working day will be the final settlement date. At any time during the 14 day period, the exporter is free to sell to any AD of his choice. However, on the final settlement day if the exporter has not concluded a transaction with an AD, the AD that has received the proceeds shall purchase the proceeds at their Floating Interbank buying rate.

On receipt of export proceed, the receiving bank will issue a receipt or receipts in the form of Certificates of Holdings, specifying the final settlement date and the amount received Exporters will not receive interest on these amounts.

5.2 Export proceeds that are purchased forward negotiated or discounted by banks

Banks will purchase 50% of the proceeds from the exporters at the applicable rate based on the SBP’s forward rate, for settlement at the maturity of the contract. The funds will be sold to the SBP at their relevant forward rate for the same maturity date. For this purpose the SBP will quote its forward rates on a daily basis. The FERC will develop a system of quoting forward prices based on interest rate differentials. The remaining 50% will be purchased by the banks at the Floating Interbank rate. As in the case of ready settlement, a 0.10% spread will be provided to the Authorised Dealers on the amounts sold to the SBP. 5.3 Amounts held in the Special Exporters’ Accounts will not attract any Statutory Reserve Requirements, relevant instructions are being issued separately.

5.4. The Special Exporters' Accounts will only be used for onward surrender to Authorized Dealers. The facility given to the exporters vide sub-paragraph (iii) of paragraph 29 - Chapter XII of the FE Manual to retain amounts in foreign currency accounts for the purposes mentioned therein, is with drawn. The Authorised Dealers will, however, allow remittances for the purpose of promotional publicity, collection of commercial intelligence, purchase of designs/patterns and market studies on the basis of demand note / debit advice, at the composite rate.

6. Other Receipts

Fifty percent of the Other Receipts purchased at the Official Exchange Rate will be required to be surrendered to the State Bank of Pakistan immediately on realization.

7. Import Payments

7.1 Essential Imports - Ready / Spot Market

Essential Imports settled in spot / ready will be purchased by the Authorised Dealers from the State Bank at the Official Exchange Rate.

7.2 Essential Imports - Forward

The Authorised Dealers will sell to their importers in forward at the Official Exchange rate. As for ready settlement, a 0.10% spread will be provided to the Authorized Dealers on the amounts purchased from the SBP.

7.3 Other Imports - Forward Rates

For other imports, banks will quote a composite forward rate based 50% on the SBP's Official forward selling rate and 50% on the Floating Interbank forward rate.

8. For the purpose of closing out of the forward contract booked prior to the issue of this circular, Floating Interbank rate quoted by the concerned A.D. on the date of the closing of the forward contract will be used. For the forward cover booked on or after the effective date of this circular, the following rates prevailing on the date of the closing out of the contract shall be used.

9. Interim Phase

There will be an interim phase from Wednesday, July 22, to Saturday, July 25, 1998 during which period none of the following transactions will be carried out :

Forward sales to clients
Forward purchases from clients
Bill Discounting

Forward and exchange commitments concluded prior to the issuance of this circular will continue to be honored as per existing agreements with the clients.

10. Requirements

Banks' Nostro limits as imposed by the SBP stand abolished with immediate effect. The banks' Net Open Position limits will be tied to their balance sheet strength, and to achieve this objective the NOPs will be limited to a maximum of 20% of their Paid-up Capital / Capital in Pakistan.

11. Other Items

1. These principles would also apply to the transaction conducted under ACU arrangement, and for imports under credit arrangements.

2. DBCs/FCBCs/Deposits in FCAs and profits accruing thereon would continue to be encashable at the SBP's Official buying rate for US Dollars and buying rates for other currencies as published by the FERC.

3. With the coming into force of these instructions, the restrictions imposed vide FE Circular No. 33 dated July 8 1998 on sale of foreign exchange for travel purposes, including studies abroad, are modified to the extent that the Authorised Dealers can sell foreign exchange for travel purposes (including studies abroad) in the light of these instructions, read with the instructions laid down in chapter XVII of the Manual.

4. Authorised Dealers are hereby directed to surrender 50% of their net overbought position as at the close of business on July 21, 1998 to State Bank of Pakistan in ready at SBP Spot Buying Rate.

12. A committee of bankers for the removal of anomalies in the implementation of the revised system has been established. The anomalies if any, may be brought to the notice of SBP.

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