All Authorised Dealers
in Foreign Exchange,

Dear Sirs,

AMENDMENT IN F.E CIRCULAR NO.25 OF 1998

Please refer to the instructions contained in paragraph B of FE Circular No. 25 of 1998 regarding new foreign currency accounts under new rules whereby commercial Banks, holding licences as Authorized Dealers and those Non-Bank Financial Institutions (NBFIs) which have been given restricted Authorized Dealers’ Licences are free to accept foreign currency deposits from any person and to invest/lend the same in Pakistan and keep/invest abroad. The expectation was that foreign currency deposits so mobilized shall mostly be placed/invested in Pakistan so that these could promote national economic objectives. The available data indicate that the bulk of such deposits have been placed by banks/NBFIs abroad. With no control of the State Bank on the quality of assets held abroad by banks/NBFIs, it poses a real problem from a regulatory point of view.

2. Accordingly, it has been decided that every bank/NBFI accepting foreign currency deposits under the scheme introduced vide FE Circular No. 25 of 1998 shall use/invest/place them within Pakistan only. In other words, foreign currency time and demand liabilities under FE Circular No. 25 shall not be placed/invested abroad by the authorized dealers. Banks/NBFIs are permitted to employ the funds for foreign currency/Rupee lending to borrowers in Pakistan or to other banks operating in Pakistan who would not transfer these funds abroad but invest/place within Pakistan. The above will apply to all new deposits mobilized under the above scheme with effect from June 3, 1999. Deposits mobilized before June 3, 1999 will not be subject to the above regulation.

3. In case a bank/NBFI is unable to profitably deploy the required part of the funds in Pakistan, the State Bank will be prepared to accept such amounts as deposits in different maturities. The State Bank will, effective from June 3, 1999 establish a window for banks/NBFIs desiring to enter into an agreement with State Bank of Pakistan and pay suitable remuneration. The State Bank shall give a guarantee of payment of these funds in foreign currency on the agreed maturity date.

4. The funds placed with State Bank will be maintained by the State Bank in a separate account and shall not be used to finance balance of payments requirements.

5. Bank/NBFIs shall submit a statement on weekly basis providing details of their foreign currency demand and time liabilities under FE-25 and their placement/investment. A separate circular is being issued for the provision of necessary date.

6. Please acknowledge receipt.