Foreign exchange companies have started feeling the heat of changed market conditions after the recent rise in the rupee’s value.

Transaction volumes of these companies are shrinking as a stronger rupee and stricter SBP monitoring have squeezed room for manipulation. Currency speculators are switching over to other avenues, including real estate, moving away from forex firms that thrived on speculation.

In a little more than four months (between December 3, 2013 and April 10, 2014), the rupee has gained about 10.5pc against the dollar in the interbank market.

“The dollar’s decline has been so huge that we’ve lost almost all our investors [read speculators],” a source close to a leading exchange company told Dawn.

These ‘investors’ are people on whose behalf exchange companies once bought and sold large amounts of dollars by maintaining duplicate account books to hoodwink the central bank. The SBP requires details of each sale deal of $5000 or more, including computerised national identity card numbers of forex purchasers and their purpose of buying.

Exchange company executives admit in private conversations that many of them used to make the bulk of their profits by speculation-driven dollar transactions, in league with unidentified ‘investors’.

But they say in addition to weak external account, a couple of other factors also promoted this practice.

“Whereas banks continue to get financial incentives under the Pakistan Remittances Initiative for mobilising home remittances, we don’t. Besides, we’re also discouraged from opening our franchises offices in un-banked, remote areas,” laments the CEO of a local exchange company.

“Even before the recent rupee rise, these things had already crippled our business, thus pushing us for speculation-driven transactions.”

Executives of exchange companies say these firms are supposed to sell foreign currencies to people travelling abroad for any purpose, including Hajj and Umrah, and to those who send it abroad to meet educational or medical expenses of their family members.

“But, despite repeated requests, we are not allowed to finance cash imports of gold,” the head of a local exchange company told Dawn.

“Had the government granted our request, this would have minimised the burden on interbank forex liquidity, and the government would not have had to [temporarily] ban regular imports of gold. It would also have opened a profitable business avenue for us.”

Government officials counter that conducting such business is the exclusive domain of banks, and cannot be shifted to non-banking institutions at all.

Analysing the shrinking volumes of their current business volumes, some executives of exchange companies admit they misjudged changing dynamics of external sector account management.

“Lack of credible forecasting has also been a factor behind our current problems,” says an official of the Exchange Companies Association of Pakistan. He recalls that when the dollar hit its historic high of Rs108.64 in the interbank market and was trading past Rs111 in the open market on December 3, 2013, “many exchange companies were still convinced that the rupee’s slide would continue.”

No one was expecting the rupee to make a surprise recovery, not even after Finance Minister Ishaq Dar’s prediction about a looming depreciation of the greenback.

But the basic issue here is not of flawed forecast. Instead, it is that forex companies have failed to catch up with changing forex market dynamics, says a SBP official. These companies are still being run in old moneychanger-style.

“Most of them have failed to develop a corporate culture. They never hire adequately-qualified staff, and many of them, if not all, are averse to the idea of meeting our reporting requirements.” As a result, “a majority of them cannot find avenues for profit making without breaching rules of business”.

Owners of exchange companies point out that the recent dollar battering, preceded by Dar’s prediction about it, had panicked even those who held a few hundred dollars for meeting genuine requirements like sending it to their children studying abroad.

“But the rates at which we got dollars from the central bank were not low enough for us to make a decent profit; more so because the central bank now requires that the spread between dollar buying and selling rates should not go beyond 1pc,” recalled a dealer at a local exchange company.

It is not only the recent rupee appreciation that has upset exchange rate manipulators. A brightened rupee outlook after growth in exports, remittances, FDI and China’s pledges for making big-ticket investment in the country, has also alarmed currency speculators.