Pakistan’s Parallel Foreign Exchange Market

This paper seeks to describe and analyze the parallel foreign exchange (FX) market in Pakistan. The very nature of this market implies that there is little formal documentation or data to describe it, and so any assessment will be, by definition, subjective. However, parties that transact in the parallel market are familiar with parts of it, on which basis this paper aims to give a comprehensive picture of the structure and evolution of this market in Pakistan. We start with a brief historical perspective, which flags the importance of workers’ remittances to the country and explains how the bulk of this inflow is transacted through the hundi/hawala network (informal moneychangers). We then place this network within the context of the larger FX market and show how it interfaces with the interbank market. We also discuss how many hundi/hawala agents have evolved into formal exchange companies and list the various sources and uses of FX transacted in the kerb market. The conclusion spells out the importance and resilience of the parallel FX market, the need to push toward full amalgamation with the formal FX market, and the key role of workers’ remittances in Pakistan’s macro-economy.