Islamabad: The National Assembly’s Standing Committee on Finance met yesterday to express concern over the slow pace of investigation by the State Bank of Pakistan (SBP) into the manipulation of the dollar by commercial banks and the realization windfall profits. He called for the final implementation report to be ready by December 15, 2022, but the SBP assured the committee that the investigation would be completed by November 30, 2022.
The committee was chaired by MP Qaisar Ahmad Sheikh. The bank informed the panel present that action would be taken against banks allegedly involved in overcharging importers when opening their letters of credit (LC).
The Deputy Governor, SBP Inayat Hussain, assured the committee that the process is in the closing phase, and that various banks have been charged, and written responses have also been received from them. In addition, the SBP has strengthened its control and no longer receives any complaints for manipulation.
Earlier in September, the SBP issued a show cause notice to eight banks over allegations of currency speculation. He sought to investigate banks that had opened letters of credit (LC) at rates higher than the spot rate. Banks have autonomy over how and when to issue their LCs, but since the SBP regulates them, they can determine the exchange rate at which these LCs operate.
“Although banks are not required to take losses, they are regulated by the SBP and must follow banking regulations. If you manipulate the market, action must be taken – even Prime Minister Sharif has called for firm action” , Miftah Ismail said at the time of the show cause notices.For context, by that time the rupee had lost 60% of its value.
The Committee reiterated that it expects stiff penalties and fines to be issued to charge Banks.
From June to July 2022, some of the commercial banks that were identified and made exorbitant unfair profits by exploiting the fluctuation of the rupee against the dollar and the huge gap between the free market and the interbank rates. The central bank official, however, said that since August no such cases had been reported.
According to Chapter 2 of the FE Handbook issued by SBP, banks are not allowed to charge more than a defined margin set by SBP. In point 11 of chapter 2, the SBP indicates the authorized exchange rates. If you explore the manual further or ask industry experts to comment on it, they will tell you that Section 4(2) of the Act states that, unless otherwise specified by the SBP, licensed brokers, Authorized exchanges and exchange companies are free to determine the exchange rate. conversion rate from Pakistani currency to any foreign currency or vice versa.
The SBP has granted a general authorization to authorized traders, which allows them to determine their own exchange rates, both for immediate transactions and for forward transactions for the public. However, this is subject to the condition that the margin between the buying and selling rates does not exceed 50 paisa per US dollar or its equivalent in other currencies.
The committee chairman said that the banks have made huge profits due to the spread, but everyone is in the dark about the action taken by the SBP against the banks.
The SBP Deputy Governor said the banks had received supporting notices saying, “We have asked the banks to give a written response and then we will hold a final meeting with them.” He also said that customers had filed written complaints during June and July, but there had been no complaints from them in the past month, mainly due to ongoing actions.
The current account deficit (CAD) is US$2.3 billion, half of last year. The monthly CAD accumulation rate was reduced from $1.5 billion previously to $0.7 billion per month, the banking regulator said.
MP Muhammad Barjees Tahir asked the Deputy Governor of the SBP why there were around 15 rupees split between free market and dollar interbank rates. He asked what action had been taken against those eight banks that had shaken up the economy.
The chairman of the committee said, “today I need dollars, but the banks don’t have any. The Governor of the State Bank is expected to come and answer these questions from the committee as he is the representative of over 22 million Pakistanis.
Capital and financial flows have also decreased, which poses problems of non-availability of dollars. He said the regulator would take enforcement action against the banks this month after completing the investigation, an SBP official said. The SBP Deputy Governor also said that “we have a market-based exchange rate.”
Tahir added that if this time these banks were not punished, they would repeat the same unfair practices to manipulate the market.
MP Khalid Magsi also said the economy was not going in the right direction. During his nearly four year tenure, Imran Khan was directionless and now, after his ousting, this government is also directionless. He further said that despite the fact that Ismail was removed from his position as finance minister and Ishaq Dar was appointed, the situation remains the same.