By Ariba Shahid
KARACHI, Pakistan (Reuters) -Pakistan on Wednesday stepped up supervision of its foreign exchange market, ordering banks to set up separate entities to conduct forex transactions and extending a clampdown on hard currency hoaders and smugglers.
Under a $3 billion loan programme agreed in July to avert a default on Pakistan’s sovereign debt, the International Monetary Fund told authorities to limit the premium between the local rupee’s interbank and open market rates to 1.25% over any given five business days.
The currency has fallen sharply this year, including a 5% decline to record lows since Aug 15, when a caretaker government took office.
The central bank said on Wednesday it was increasing supervision of FX transactions to fulfil that loan condition, and to “strengthen governance, internal controls and compliance culture in the sector.”
Banks will need to set up wholly owned exchange companies to conduct foreign exchange business. Those companies’ minimum capital requirements would be raised to 500 million rupees ($1.63 million) from 200 million rupees, the central bank said.
Enforcement measures against currency hoarders, black marketeers and smugglers have also been undertaken to bridge the gap between the market rates.
Security officials with knowledge of the crackdown told Reuters that border monitoring systems were being upgraded.
Under the loan programme, the IMF also called for a market determined exchange rate and the removal of import restrictions.
Shahid Habib, CEO of brokerage Arif Habib Limited, said a crackdown on the informal currency market had helped the gap between the rupee’s interbank and open market rates shrink to close to 1%.
On Wednesday it stood at around 1.3%, down from a peak of 5% late last week.
($1 = 307.0000 Pakistani rupees)
(Reporting by Ariba Shahid in Karachi; editing by Christina Fincher and John Stonestreet)