KARACHI, June 7: Mini exchange companies being set up by money changers will have to sell their foreign currency stocks daily to mainstream exchange companies or banks: they will be free to sell their foreign currency stocks on daily basis also to other mini exchange companies.

The Exchange Policy Department of the State Bank conveyed this decision to authorized money changers through a circular issued on Monday. This decision will help the central bank check illegal outflow of foreign exchange thus improving day-to-day forex supply into the banking system.

After wallowing in excess inflow of foreign exchange in the last fiscal year Pakistan is now facing a gradual fall in it. This has become all the more pronounced due to early external debt payments by the government and the corporate sector. It is against this backdrop that the central bank is making efforts to check illegal outflows of foreign exchange.

The State Bank lately allowed all 378 licensed money changers to form mini exchange companies to continue their business ahead of the June 30 deadline set for them to pack up and quit.

The SBP had decided two years ago to do away with loosely monitored money changers and transform their businesses into better-regulated exchange companies. The key purpose of the decision taken on the insistence of the IMF was to eliminate dual exchange rate regime and to check money laundering.

A number of money changers responded to this decision and set up exchange companies with a minimum paid-up capital of Rs100 million. A dozen such companies are already in operation.

For others who had not this much money the SBP relaxed the rules and allowed them to form mini exchange companies with initial paid-up capital of Rs20 million. Money changers have welcomed this decision and are preparing to jointly set up such companies by pooling their resources and skills. The SBP says at least five money changers should join hands to set up such a company.

The SBP circular issued on Monday contains detailed procedure for setting up and running mini exchange companies. The circular says the central bank will process the applications for setting up these companies within three working days.

Once the applicants get a no-objection certificate from the SBP they will go to the Securities & Exchange Commission of Pakistan for getting their companies incorporated. After getting them registered at SECP they will come back to SBP again and seek its final approval to begin operations.

In the fiscal year July/June 2002/03 Pakistan attracted an all time high inflow of $4.17 billion from Pakistanis working abroad. During the same year Pakistan's exports crossed the $10 billion mark and reached $11.1 billion.

This improved its balance of payments situation and emboldened the government and the corporates to start repaying external debt ahead of schedule to reduce their cost of borrowings.

This coupled with an expanded trade deficit due to faster increase in imports is putting pressure on balance of payments. The problem is worsening due to lower remittances from overseas Pakistanis and a decline in foreign private investment.

The SBP circular to money changers contain several clauses to improve monitoring of foreign exchange inflows and outflows and fit well into the described forex scenario.

Some critical clauses are:

(i) Mini exchange companies or the exchange companies in B category as the SBP prefers to call them will be allowed only to buy and sell foreign currency notes and coins.

(ii) They will not be allowed to engage in any other activity such as remittances transfers/deposit taking or lending etc. directly or indirectly. (Mainstream Exchange Companies are free to make remittances transfers).

(iii) They will be allowed to buy and sell foreign exchange in ready value only. That is they will not make forward deals.

(iv) They shall also equip themselves with necessary qualified staff to properly manage computerized reporting to the State Bank.

(v) Their dealings with the customers shall be supported by official receipts, a copy of which will have to be kept in record.

(vi) Every receipt provided to the customer shall be sequentially numbered and also bear the name of the company, date, nature of transaction i.e. sale/purchase, currency dealt, exchange rate and initials of dealer/authorized employee.

(vii) For currency exchange transactions exceeding $10,000 (or equivalent in other currencies) the name, address and national identity card/passport Number of the customer shall also be mentioned on the receipt after due verification.

(viii) For the purpose of annual statutory audit, the company shall appoint only those auditing firms that are on the approved list of the SBP audit of banks.

Licences for setting up mini exchange companies will be issued for three years renewable thereafter for the same period.