Annual Report on Exchange Arrangements and Exchange Restrictions 2005
Chapter

PAKISTAN

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2005
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(Position as of December 31, 2004)

Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: July 1, 1994.
Exchange Arrangement
CurrencyThe currency of Pakistan is the Pakistan rupee.
Exchange rate structureUnitary.
Classification
Managed floating with no predetermined path for the exchange rateAll current international transactions are conducted in the interbank exchange market. Corporate investment in foreign currency may be remitted through the interbank market with the State Bank of Pakistan’s (SBP) approval. Banks may purchase foreign exchange from foreign exchange companies (FECs) at freely negotiated rates.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketThe maximum term of forward cover provided by banks for trade transactions is 12 months, although this may be rolled over; these facilities are also provided for funds transferred from abroad for portfolio investment. Effective November 18, 2004, forward cover against exports on a contract basis is permitted. ADs may also extend forward cover for imports (only against LCs), exports, and foreign private loans.
Official cover of forward operationsThe SBP provides forward cover for frozen foreign currency accounts (FCAs) and the National Debt Retirement Program, subject to an annual fee of 4% on onshore dollar deposits. No forward cover is offered on new foreign currency deposits.
Arrangements for Payments and Receipts
Prescription of currency requirementsSettlements of current and capital account transactions with other countries are allowed in fully convertible currencies as chosen by the contracting parties.
Controls on the use of domestic currency
For capital transactions
Transactions in derivatives and other instrumentsEffective November 26, 2004, banks that are authorized derivatives dealers are allowed to engage in financial derivatives transactions, including foreign currency options, forward rate agreements, and interest rate swaps.
Credit operationsYes.
Use of foreign exchange among residentsAll obligations among residents are settled in Pakistan rupees.
Payments arrangements
Regional arrangementsPakistan is a member of the ACU.
Clearing agreementsPayments to, and receipts from, member countries of the ACU for current transactions are effected in AMUs, at the rate of AMU 1 per $1. Accounts are settled every two months.
Administration of controlThe SBP has delegated authority to a number of banks and financial institutions to deal in all foreign currencies and to sell or purchase foreign exchange within limits prescribed by the SBP for different transactions. Banks are allowed to provide foreign exchange in excess of the prescribed limit for bona fide requirements. In addition, the SBP issues licenses to FECs for the sale and purchase of foreign currency in cash and for other business remittances. Effective June 7, 2004, the licenses of authorized money changers expired and they are permitted to reestablish as category “B” exchange companies that deal only in the purchase or sale of foreign currency notes and coins.
International security restrictions
In accordance with UN sanctionsYes.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on domestic ownership and/or tradeLocal trade in gold bullion is unrestricted.
Controls on external tradeNo restrictions apply to exports. Imports exempt from normal import tariffs may be effected by exporters of gold jewelry registered with the Board of Investment.
Controls on exports and imports of banknotes
On exports
Domestic currencyAn individual may take out up to PRs 500 to India and PRs 3,000 to other countries.
Foreign currencyThere are no restrictions on the exports of foreign currency through banks and exchange companies. Individuals may take out up to $10,000 or its equivalent without permission. Exports exceeding $10,000 or PRs 3,000 to the Islamic Republic of Afghanistan may be effected by international organizations, subject to certain conditions.
On imports
Domestic currencyAn individual may bring in up to PRs 500 from India and PRs 3,000 from other countries.
Resident Accounts
Foreign exchange accounts permittedBanks and nonbank financial institutions are allowed to offer a new FCA scheme. Holders of frozen (old) FCAs are permitted to purchase special dollar bonds of the government of Pakistan against the outstanding balances in their FCAs or to convert the foreign currency into Pakistan rupees at the prevailing exchange rate.
Held domesticallyThese accounts may be credited with remittances from abroad, traveler’s checks, and foreign currency notes. However, receipts from exports of goods and services, earnings from services of residents, earnings and profits of overseas offices or branches of Pakistan firms or companies and banks, and foreign exchange released from Pakistan for any specified purpose may not be credited to these accounts. FCAs maintained by resident corporate bodies or legal entities may not be credited with foreign currency purchased in the exchange market. These accounts may be permanently retained. Under the new FCA scheme, institutions are free to keep or invest their deposits abroad or in Pakistan. To lend these deposit funds to borrowers in Pakistan for trade-related activities, ADs are required to observe prudential regulations of the SBP. ADs are free to decide the rate of return that they offer to depositors.
Held abroadBalances of up to the equivalent of $1,000 may be held abroad by residents in any country (except the Islamic Republic of Afghanistan, Bangladesh, India, and Israel) in FCAs, which may not be used for operations from Pakistan without the approval of the SBP.
Accounts in domestic currency held abroadNo.
Accounts in domestic currency convertible into foreign currencyYes.
Nonresident Accounts
Foreign exchange accounts permittedThe following may open FCAs and transact freely with banks in Pakistan without prior approval of the SBP. Pakistan nationals residing abroad; foreign nationals, whether residing abroad or in Pakistan; charitable organizations; firms and companies owned by persons who are otherwise eligible; and diplomatic missions and the staffs of international organizations. ADs are free to decide the rate of return they offer to depositors. Deposit holders wishing to make payments in Pakistan in Pakistan rupees must first convert the foreign exchange drawn from their accounts into Pakistan rupees. If Pakistan nationals holding such accounts return to Pakistan, they may retain the accounts permanently. There is no ceiling on interest rates on these accounts.
Holders of frozen (old) FCAs are permitted to purchase dollar bonds of the government of Pakistan against outstanding balances in their FCAs. Funds mobilized under the new FCA scheme are not required to be surrendered to the SBP nor does the SBP provide forward cover for such accounts.
Domestic currency accountsThe accounts of individuals, firms, or companies residing outside Pakistan are designated nonresident accounts. Different rules apply to the nonresident rupee accounts of individuals, firms, or companies, on the one hand, and to the nonresident rupee accounts of banks, on the other hand. Banks are permitted to open nonresident accounts for nonbank nonresidents without prior SBP approval when the accounts are opened with funds received from abroad through banking channels or with rupee funds accepted for remittance abroad. Debits and credits to nonresident accounts for specified purposes may be made by authorized banks without prior approval.
Foreign shipping companies and airlines with offices or agents in Pakistan may open and operate interest-bearing rupee accounts, provided that the interest is used only to meet local expenses. Effective July 1, 2004, banks are allowed to issue ATM cards as well as supplementary ATM cards to individual nonresident rupee account holders. Withdrawals are allowed only in Pakistan.
Convertible into foreign currencyDomestic currency accounts are convertible into foreign currency when opened as convertible rupee accounts with funds received from abroad or credited with funds otherwise accepted for remittance abroad.
Blocked accountsAccounts of residents of India, other than the accounts of the Indian Embassy and its personnel, are blocked.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for imports
Advance payment requirementsAdvance payments of up to 50% of the c.i.f. value are allowed for imports of industrial capital goods, plant machinery, and manufacturing equipment, excluding spare parts. Payments exceeding this limit require SBP approval. Effective November 1, 2004, advance payments for capital goods require irrevocable LCs. Previously, there was no such requirement. Advance payments for noncapital goods imports are permitted up to 50% of estimated c.i.f. value upon submission of evidence of bona fides and a bank guarantee. Foreign currency financing is available for a maximum period of 180 days.
Documentation requirements for release of foreign exchange for importsClean-on-board shipped bills of lading and other documentation as stipulated by contracts or LCs are required.
Domiciliation requirementsYes.
Letters of creditImports against contracts are also permissible.
Import licenses and other nontariff measuresImport licenses are not required.
Positive listA positive list is maintained with respect to imports from India. Effective November 21, 2004, this list is extended to 768 items from 687 items (effective July 22, 2004).
Negative listMany of the products on the negative list consist of products banned for religious and health reasons, and goods banned under international agreements.
Other nontariff measuresImports from Israel are prohibited. Imports of 43 items on the health and safety list are restricted. Imports of 21 items on the procedural list must meet certain technical requirements (e.g., petroleum) or certain other conditions (e.g., unassembled cars).
Import taxes and/or tariffsThe import tariff structure consists of four rates: 5%, 10%, 20%, and 25%; higher tariffs apply on beverages, liquor, spirits, motor vehicles, and vinegar. A 6% tax is levied on the value of imports by commercial importers.
State import monopolyNo.
Exports and Export Proceeds
Repatriation requirementsProceeds must be repatriated through an AD by the due date or within six months from the date of shipment, whichever is earlier. Exporters may retain the export proceeds including advance payments in foreign currency with an AD for three working days and to sell them to ADs. ADs keep the retained proceeds in “Special Exporters’ Accounts.”
Surrender requirementsExporters are required to sell export proceeds in the intrabank market within three days. Exporters may retain up to 10% of the f.o.b. value in their FCAs for effecting payments for such expenses as advertising, purchases of designs and patterns, market studies, bona fide export claims, and to cover export proceeds without approval from the SBP. For software and service sector exports, this limit is 35%. Exporters reporting an increase of more than 10% in export earnings may keep 50% of the additional earned amount in FCAs.
Financing requirementsForeign currency financing is available for a maximum period of 180 days. Effective November 1, 2004, all foreign exchange loans against intended exports may be settled only through export proceeds or remittances from abroad (previously, loans for contracts that were subsequently cancelled could be settled through the interbank market).
Documentation requirementsThe documents required are a firm order and Form E. The Form E requirement does not apply to exports of textbooks for schools and colleges for Pakistani students and other institutions operating under embassies abroad. Effective May 4, 2004, literary, religious, educational, and general books are granted such exemption if the value of individual shipments does not exceed $10,000, or its equivalent, in value.
DomiciliationYes.
Preshipment inspectionPreshipment inspection is mandatory for basmati rice exports.
Export licensesNo.
Export taxesAn export development surcharge of 0.25% is levied on all exports, except for a few specified items, to be paid to the SBP or an authorized bank when the export proceeds are realized.
Other export taxesAn income tax of 1.25% applies to export proceeds; a reduced rate of 1% applies to exports of goods manufactured in Pakistan. A rate of 0.75% applies to exports of bed linen; blankets; ceramics; cutlery; engineering goods; handmade carpets and rugs; horticultural products; jewelry; leather and textile products; pharmaceutical products; surgical equipment; sporting goods; and wooden furniture, doors, and windows.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersADs may issue foreign currency–denominated traveler’s checks for any purpose, provided they are paid for with an equivalent amount of foreign currency. Exchange companies may freely transfer funds abroad on behalf of individuals.
Trade-related paymentsThe payment of freight against invoices is unrestricted. Commissions, brokerage fees, and other charges are generally limited to 10% of invoice values. The following rates apply: 1% for cement, 2% for cotton, and higher rates for a few other goods.
Quantitative limitsYes.
Indicative limits/bona fide testIndicative limits or bona fide tests apply to the payment of commissions.
Investment-related paymentsThe remittance of dividends declared on current profits may be made freely to foreign shareholders if the investment was made on a repatriable basis. The remittance of profits by branches of foreign companies—other than banks and those engaged in insurance, shipping, and the airline business—and of dividends to foreign portfolio investors credited to their convertible rupee accounts is permitted without restriction. Remittances of royalty, franchise, and technical fees or service charges in the financial sector are allowed, subject to certain restrictions.
Quantitative limitsInterest payments are allowed up to 1.5% over LIBOR on borrowing for foreign currency working capital or general purposes. However, there is no limit on interest for project loans. The payment of interest is permitted for imports only on a usance basis.
Payments for travel
Quantitative limitsYes.
Indicative limits/bona fide testThe prescribed limit is $50 or its equivalent a person a day up to a maximum of $2,100 a calendar year. However, ADs may provide additional travel allowances in bona fide cases.
Personal paymentsForeign exchange allowances for students’ tuition fees and expenses, as required by institutions, may be obtained from ADs without approval from the SBP. No restrictions apply on remittances of premiums on all types of life insurance policies.
Other paymentsEffective July 2, 2004, ADs are authorized to release foreign exchange up to a maximum of $100,000 or its equivalent an invoice with respect to payments for information technology services. This applies to companies incorporated in Pakistan. Effective November 20, 2004, this authorization was extended to branches of foreign companies that operate in Pakistan with the permission of the Board of Investment and that pay local taxes and repatriate their profits abroad. Effective June 22, 2004, ADs may remit lease payments by airlines incorporated in Pakistan up to the guaranteed hours; payments for time over the guaranteed hours require SBP approval. No limits apply to subscriptions and membership fees paid by individuals.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsYes.
Surrender requirementsProceeds of foreign exchange earnings must be sold to an AD.
Restrictions on use of fundsNo.
Capital Transactions
Controls on capital transactionsYes.
Controls on capital and money market instrumentsWith prior SBP permission, Pakistan residents, as well as firms and companies, may make equity-based investments, including portfolio investments, in companies abroad (i.e., joint ventures) on a repatriable basis. However, individuals may purchase and remit abroad foreign currencies through licensed exchange companies without any restrictions on amount and purpose.
On capital market securities
Shares or other securities of a participating nature
Sale or issue locally by nonresidentsNo controls apply on the sale of securities purchased in Pakistan. Nonresidents may solicit subscriptions for shares and debentures in Pakistan with prior Securities and Exchange Commission of Pakistan (SECP) approval.
Purchase abroad by residentsPrior SBP approval is required.
Sale or issue abroad by residentsResidents may sell or issue securities with approval from the SECP. The proceeds associated with these issues must be transferred to Pakistan or used for the purchase of plants and machinery from abroad. Transfer of funds required to service these securities issues is permitted.
Bonds or other debt securities
Purchase locally by nonresidentsNonresidents are allowed to trade freely in registered corporate debt instruments and bonds listed on the stock exchange, federal investment bonds, Pakistan investment bonds (PIBs), and market treasury bills (MTBs). Foreign bank branches in Pakistan and foreign-controlled investment banks are permitted to make investments in registered, listed corporate debt instruments in the primary and secondary markets.
Sale or issue locally by nonresidentsThere are no controls on the sale of bonds and other debt securities purchased in Pakistan. Nonresidents may solicit subscriptions in Pakistan with prior SECP approval.
Purchase abroad by residentsYes.
Sale or issue abroad by residentsPrior SECP approval is required.
On money market instruments
Purchase locally by nonresidentsNo controls apply to the purchase of certificates of investment, PIBs, MTBs, and term finance certificates by nonresidents.
Sale or issue locally by nonresidentsNonresidents are not permitted to issue such instruments in Pakistan.
Purchase abroad by residentsThese transactions are not permitted through the ADs.
Sale or issue abroad by residentsResidents may sell or issue money market instruments after obtaining approval from the SECP. The proceeds associated with these issues must be transferred to Pakistan or used for the purchase of plants and machinery from abroad. The transfer of funds required to service these securities issues is permitted.
On collective investment securities
Sale or issue locally by nonresidentsThere are no controls on the sale of collective investment securities in Pakistan. Nonresidents may solicit subscriptions in Pakistan with prior SECP approval.
Purchase abroad by residentsThese transactions are not permitted through the ADs.
Sale or issue abroad by residentsResidents may sell or issue securities after obtaining approval from the SECP. The proceeds associated with these issues must be transferred to Pakistan or used for the purchase of plants and machinery abroad. The transfer of funds required to service these securities issues is permitted.
Controls on derivatives and other instrumentsBanks are permitted to enter into derivatives transactions abroad for certain categories with prior SBP approval.
Purchase locally by nonresidentsNonresidents may purchase securities and bonds listed on the stock exchange.
Sale or issue locally by nonresidentsThere are no controls on the sale of securities purchased in Pakistan. Single stock futures are issued by the stock exchanges and not by the companies by themselves.
Purchase abroad by residentsBanks are permitted to enter into derivatives transactions abroad for permissible categories with prior SBP approval.
Sale or issue abroad by residentsResidents may sell such securities with SECP approval.
Controls on credit operations
Commercial credits
By residents to nonresidentsCredits of up to six months are permitted with respect to exported goods, and up to 12.5 years with respect to the export of plants and machinery.
Financial credits
By residents to nonresidentsThese credits are not allowed. However, ADs may extend rupee overdrafts to foreign nationals locally up to the extent of their requirements.
Guarantees, sureties, and financial backup facilities
To residents from nonresidentsThese transactions are subject to compliance with other credit controls.
Controls on direct investment
Outward direct investmentDirect investment abroad requires prior approval under foreign exchange laws. Pakistani nationals as well as residents, including firms and companies, may make equity-based investments, including portfolio investments, in companies abroad (i.e., joint ventures) on a repatriable basis. Prior SBP permission is required, however.
Inward direct investmentPrior approval is not required for investment in the manufacturing and services sectors. Foreign investors are allowed to hold equity up to 100% in new industrial units. Investment in arms and ammunition, security printing, currency and minting, high explosives, and radioactive substances requires prior approval. Investment in the production of alcoholic beverages is prohibited. Foreigners are permitted to make investments in services, infrastructure, social, and agricultural sectors, subject to the condition that the foreign equity investment be at least $300,000 or the equivalent, while for the service sector, the minimum investment is $150,000. Foreign investors may hold 100% equity in social and infrastructure sectors. In the case of the services sector, they may hold 100% of equity.
Controls on liquidation of direct investmentLiquidation proceeds must be repatriated to Pakistan through normal banking channels.
Controls on real estate transactions
Purchase abroad by residentsResidents are not permitted to purchase real estate abroad.
Controls on personal capital transactionsFamily remittances and all other remittances effected by nonresidents to residents exceeding the equivalent of $10,000 are exempt from the requirement of filing forms; however, they must be declared to ADs.
Loans
By residents to nonresidentsYes.
Gifts, endowments, inheritances, and legacies
By residents to nonresidentsUp to PRs 500 is permitted.
Transfer of assets
Transfer abroad by emigrantsYes.
Transfer of gambling and prize earningsRemittance is not allowed.
Provisions specific to commercial banks and other credit institutionsForeign-controlled investment banks are permitted to borrow locally for their working capital requirements of up to 100% of their paid capital, reserves, etc., subject to observance of all other nonbank financial institutions’ rules. Banks are required to maintain domestically not less than 80% of their assets against time and demand liabilities as specified in Part A of Form X, as prescribed in Rule 17 of the Banking Companies Rules of 1963.
Borrowing abroadTransactions are allowed for temporary periods, and only if they are necessary for the normal course of business.
Lending locally in foreign exchangeThese transactions are allowed only for financing exports and imports against foreign currency deposits.
Purchase of locally issued securities denominated in foreign exchangeThere are no locally issued securities that are denominated in foreign currency.
Differential treatment of deposit accounts in foreign exchangeAll bank and nonbank financial institutions that accept foreign currency deposits may use deposited funds freely in Pakistan. Any other use is subject to prudential regulations.
Reserve requirementsBanks are required to maintain separate dollar cash reserves with the SBP against foreign currency deposits. The requirements are 5% in an unremunerated cash reserve account and 15% in a special cash reserve account, the interest rate of which is announced monthly. Rupee deposits are subject to a 5% cash reserve requirement and 15% special liquidity requirement, which must be held in approved securities.
Liquid asset requirementsIn accordance with prudential regulations, balances must be kept in dollars.
Differential treatment of deposit accounts held by nonresidents
Reserve requirementsIn accordance with prudential regulations, balances must be kept in dollars.
Investment regulations
Abroad by banksAll bank and nonbank financial institutions that accept foreign currency deposits may use deposited funds freely in Pakistan. Any other use is subject to prudential regulations.
In banks by nonresidentsPrior approval is required.
Open foreign exchange position limitsThere is an aggregate foreign exchange exposure limit for each bank equivalent to 10% of its paid-up capital, with maximum and minimum limits of PRs 500 million and PRs 50 million, respectively, and exceptions require SBP prior approval.
On resident assets and liabilitiesYes.
On nonresident assets and liabilitiesYes.
Provisions specific to institutional investorsNo.
Other controls imposed by securities lawsNo.
Changes During 2004
Exchange arrangementNovember 18. Forward cover against exports on a contract basis was allowed.
Arrangements for payments and receiptsJune 7. The authorized money changers whose licenses expired were permitted to reestablish as category “B” exchange companies that dealt only in the purchase or sale of foreign currency notes and coins.
November 26. Banks that were authorized derivatives dealers were allowed to engage in financial derivatives transactions, including foreign currency options, forward rate agreements, and interest rate swaps.
Nonresident accountsJuly 1. Banks were allowed to issue ATM cards as well as supplementary ATM cards to holders of individual nonresident rupee accounts. Withdrawals were permitted only in Pakistan.
Imports and import paymentsJuly 22. A positive list of 687 items was maintained with respect to imports from India.
November 1. Irrevocable LCs were required for advance payments for imports of capital goods.
November 21. The number of items in the positive list of imports from India was raised to 768 items from 687 items.
Exports and export proceedsMay 4. Literary, religious, educational, and general books were exempted from the Form E requirement if the value of individual shipments did not exceed $10,000 or its equivalent in value.
November 1. All foreign exchange loans against intended exports were required to be settled only through export proceeds or remittances from abroad.
Payments for invisible transactions and current transfersJune 22. ADs were permitted to remit lease payments by airlines incorporated in Pakistan up to the guaranteed number of hours; payments for time over the guaranteed hours required SBP approval.
July 2. ADs were authorized to release foreign exchange up to a maximum of $100,000 or its equivalent an invoice with respect to payments for information technology services by companies incorporated in Pakistan.
November 20. ADs were authorized to release foreign exchange up to a maximum of $100,000 or its equivalent an invoice with respect to payments for information technology services by branches of foreign companies operating in Pakistan with the permission of the Board of Investments and that pay local taxes and repatriate their profits abroad.

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