The State Bank of Pakistan (SBP) recently announced a significant development that will have a positive impact on customers and businesses involved in card-based cross-border transactions with international payment schemes such as Visa and MasterCard. This decision allows authorized dealers of foreign exchange to purchase the US dollar directly from the inter-bank market. In this article, we will explore the details of this decision, its background, and its implications for the market.
Background on the Exchange Rate Situation
Over the past few months, there has been a widening gap between the exchange rates of the US dollar in the inter-bank market and the open market. While the inter-bank market has maintained a relatively stable exchange rate, the open market has seen a significant depreciation of the Pakistani rupee against the US dollar. This situation has created challenges for customers and businesses engaged in cross-border transactions, as they were charged the open-market exchange rate, which was considerably higher.
The Circular Issued by the State Bank of Pakistan
To address this issue, the State Bank of Pakistan issued a circular to all authorized dealers of foreign exchange. The circular confirmed the decision to allow these dealers to purchase the US dollar from the inter-bank market for settlement of card-based cross-border transactions. The instructions provided in the circular are applicable with immediate effect and will remain in place until July 31, 2023, unless otherwise notified.
Objective of the Decision
The main objective of this decision is to reduce demand-side pressure on exchange companies and facilitate customers in obtaining a lower exchange rate for their card-based cross-border transactions. By allowing authorized dealers to purchase the US dollar from the inter-bank market, the SBP aims to bridge the gap between the inter-bank and open-market exchange rates. This move is expected to bring down the open market's USD rate and make it more aligned with the inter-bank rate.
Response from the Exchange Companies Association of Pakistan (ECAP)
The Exchange Companies Association of Pakistan (ECAP) has welcomed the SBP's circular, expressing their approval of the decision. Zafar Paracha, the general secretary of ECAP, believes that the SBP made the right decision at the right time. He anticipates that this move will help decrease the open market's exchange rate for the US dollar and subsequently reduce the gap between the inter-bank and open-market rates.
Previous Practice and Changes
Prior to this circular, customers engaging in cross-border transactions with their credit or debit cards were charged the open-market exchange rate. However, due to the significant depreciation of the Pakistani rupee in the open market, customers had to bear higher costs for their transactions. Meanwhile, the inter-bank market maintained a relatively stable exchange rate for the US dollar. This difference in rates created a burden on customers and led to an imbalance in the market.
Implications for the Market
The implementation of this circular is expected to have significant implications for the market dynamics. While the volume of transactions in the open market is anticipated to decrease, it is unlikely to cause a significant disruption in the interbank market. The reduction in pressure on the open market will help stabilize the exchange rate and reduce the gap with the inter-bank rate. This development is expected to bring more stability and confidence to the market.
The State Bank of Pakistan's decision to allow authorized dealers of foreign exchange to purchase the US dollar from the inter-bank market for settlement of card-based cross-border transactions is a significant step toward reducing the gap between the inter-bank and open-market exchange rates. By facilitating customers in obtaining a lower exchange rate, this decision aims to alleviate the financial burden on individuals and businesses engaged in cross-border transactions. It is a timely and proactive measure to address the challenges posed by the widening gap between the two markets.
FAQs
FAQ 1: What is the interbank market?
The inter-bank market is a platform where banks and financial institutions trade currencies among themselves at prevailing market rates.
FAQ 2: How will this decision affect customers?
This decision will benefit customers by allowing them to obtain a lower exchange rate for their card-based cross-border transactions, reducing their costs.
FAQ 3: Will this decision impact businesses engaging in cross-border transactions?
Yes, businesses involved in cross-border transactions will also benefit from the lower exchange rate, as it will reduce their transaction costs and enhance their competitiveness.
FAQ 4: Can individuals also benefit from the lower exchange rate?
Absolutely! Individuals engaging in card-based cross-border transactions, such as online shopping or international travel, will be able to take advantage of the lower exchange rate, saving them money.
FAQ 5: How long will this decision be in effect?
As per the circular issued by the State Bank of Pakistan, this decision will remain in effect until July 31, 2023, unless otherwise notified.
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