View from Islamabad: New forex regime must not push dealers away

Pakistan's new financial year, which began last month, has kicked off one of the boldest efforts by any government to regulate foreign currency dealers.

Pakistan's central bank, the State Bank of Pakistan, wants such dealers to register as formal exchange companies or associate themselves with such companies in two years.

Such measures are meant to work as a precursor to the application of tighter regulations such as regular inspection of accounts to keep track of money laundering.

Pakistan is understandably anxious to take steps against money laundering while sustaining its foreign currency reserves which have soared to an unprecedented $7 billion.

The reserves have soared largely due to the rapid rise in remittances from Pakistanis with savings abroad. A large portion of the momentum driving the remittances has come from the fear among many Pakistanis that they face the risk of being exposed to worldwide investigations into money laundering, as a fallout from September's terrorist attacks.

Moreover, Pakistan has been under pressure from the western world led by the U.S. to take stronger steps in curbing money laundering as a way to prevent the financing of terrorist operations through unregulated portions of the banking system.

However, the measures now being taken are faced with two potential gaps.

First, many Pakistanis living abroad with the genuine need to remit funds back home have often found it easier to deal with foreign currency dealers rather than regular banks.

While many Pakistani banks claim to have improved their services, some areas such as remitting funds to recipients in far-flung areas, continue to suffer from periodic delays.

In sharp contrast to the concept of 24-hour delivery for remittances through money dealers, bank remittances could sometimes take several days.

Tighter regulation of the money changers, though driven by understandable intentions, nevertheless would be counter-productive if new rules hit efficiency.

Second, it's not clear if, indeed, the tighter regulations would in fact be successfully enforced, or as argued by some, lead to many foreign currency dealers being forced to go underground.

Young Pakistanis may never have had the experience of going through the back alleys of a city, such as Karachi, in search of modest amounts of foreign currencies, but the past serves an important lesson. Tighter controls with all the best intentions are still capable of driving businesses to operate from underground in a partial return to a past legacy.

Pakistan's best hope lies in enforcing regulations which tighten up the monitoring of remittances to ensure fresh curbs on illicit transactions.

Yet, such enforcement must be done in a user-friendly way with nominal financial burden on businesses otherwise capable of being slapped with licensing fees.

In the end, Pakistan's new foreign exchange regime will only help the country to wash off its reputation as a safe haven for terrorist financing. But that emergence must be driven by a new regime which foreign currency dealers find hard to reject.