By Zafar Bhutta
Published in The Express Tribune on September 14, 2024
ISLAMABAD: The State Bank of Pakistan (SBP) has proposed performance-based incentives for banks and exchange companies to encourage higher remittance inflows through formal banking channels.
Sources told The Express Tribune that during a recent Economic Coordination Committee (ECC) meeting, the deputy governor of SBP explained that the current incentives, which are transaction-based, need to be revised to focus more on performance.
Previously, the incentive base rate was 30 Saudi Riyal (SAR) per $100 transaction. The SBP has now proposed reducing this base incentive to 20 SAR per $100 transaction.
An additional reimbursement of 8 SAR per incremental eligible transaction would be made for growth up to 10% or $100 million over the previous year, whichever is lower.
A further reimbursement of 7 SAR would be provided for growth exceeding 10% or $100 million.
Concerns were raised during the meeting about whether a cost-benefit analysis had been conducted, as the scheme could have significant financial implications for the national exchequer.
In response, the central bank clarified that this scheme had been in place for years and had proven effective in increasing remittances, bringing in nearly $30 billion annually.
The reduction in the base rate, from 30 SAR to 20 SAR, would also help lower the government’s overall Telegraphic Transfer (TT) charges.
The SBP representative also explained other proposed revisions pertaining to exchange companies.
The Finance Division informed the committee that the government, through SBP and the Pakistan Remittance Initiative (PRI), has implemented various schemes to encourage remittances via formal channels.
These schemes were revised in 2023, resulting in consistent growth in remittance inflows. For FY 2024, remittances saw a positive cumulative growth of 10.7% year-on-year, totalling $30.3 billion, compared to $27.3 billion in FY 2023.
SBP has proposed further revisions to two Home Remittance Incentive Schemes, originally approved by the ECC/Cabinet, and now requiring ECC approval for the proposed changes.
Reimbursement of TT charges
Launched in 1985, this scheme aims to provide remittance transactions at zero cost for the sender and receiver in Pakistan for transactions exceeding $100.
Banks and financial institutions involved receive a uniform incentive for eligible transactions.
The incentive rate was raised to 30 SAR last year, a change that positively impacted remittance inflows. Now, SBP proposes dividing the flat 30 SAR reimbursement into fixed and variable components.
The fixed component would offer 20 SAR for all eligible transactions over $100.
The variable component would provide an additional 8 SAR per incremental eligible transaction for growth up to 10% or $100 million, whichever is lower.
For growth exceeding 10% or $100 million, an additional 7 SAR per incremental transaction would be provided.
This structure allows banks achieving higher remittance inflows to receive up to 35 SAR per eligible transaction, with performance evaluated monthly and adjustments made in the last quarter of the financial year.
SBP believes these revisions will incentivise banks to increase remittance inflows while potentially reducing the government’s overall TT charge expenses.
Incentive scheme for EC
Launched in 2022, this scheme encourages exchange companies (EC) to surrender 100% of foreign exchange in the interbank market.
The current rate is Rs1 per USD mobilised. The SBP proposes increasing the fixed base rate from Rs1 to Rs2 per USD surrendered in the interbank market to SBP-designated banks.
Additionally, a variable component would offer Rs3 per USD for incremental remittances up to 5% or $25 million, whichever is lower, and Rs4 per USD for growth exceeding 5% or $25 million.
Payments would be based on surrendering foreign exchange according to SBP-prescribed percentages, with performance evaluated monthly and adjustments made in the last quarter of the financial year.
SBP argues that these revisions will encourage exchange companies to mobilise more remittances and help offset their increased operating costs.
ECC approval
The ECC of the Cabinet considered the Finance Division’s summary on the “Proposal for Revision in Home Remittances Incentive Schemes” and approved SBP’s proposed changes to both the TT Charges Scheme and the Incentive Scheme for Exchange Companies.
