How the country built, broke, and rebuilt the rules that govern who gets to hold dollars
By Asad Baig · Lahore · May 2026 · Approx. 22-min read
Why this history matters
When I started looking at Pakistan's foreign currency framework, I expected to find a story of recent failure. A few bad policy choices in the past decade. Some incompetence at the State Bank of Pakistan. Maybe a couple of corrupt politicians.
What I found instead was a seventy-six-year inheritance. Every restriction I face as an IT entrepreneur in 2026 traces back to specific decisions made by specific people in specific decades, building on each other in ways that most Pakistanis have never seen laid out clearly. The architecture is not an accident. It is the result of twelve distinct phases of policy-making, each one solving the problems of its era and creating the problems of the next.
This article puts those twelve phases in one place. It is the historical record I wish someone had handed me when I first asked whether my company could have a USD account. If you read it through, you will understand why your bank card costs you 25 to 30 percent more than it should, why the 1998 trauma still shapes every policy conversation, why the Roshan Digital Account is the one product that worked, and why the answer to "can a Pakistani company hold dollars freely" depends on questions that go far deeper than banking regulation.
For the personal-stance version of this argument, see my position on Pakistan's foreign currency account problem. For the dollar-cost analysis, see how Pakistan's FCY system costs the productive class $25 to 36 billion a year. This article is the historical foundation that both of those rest on.
The 12 phases at a glance
Pakistan's foreign currency framework has passed through twelve distinct phases since independence. The complete sequence, with the defining feature of each:
1947-1959, The inherited sterling system. FERA 1947 imported wholesale. Two-tier access from day one.
1959-1971, Limited opening. Non-Resident Foreign Currency Accounts created under Ayub Khan.
1971-1985, The restriction era. Bhutto's bank nationalisation. FEBCs introduced in 1973.
1985-1991, Cautious liberalisation. First resident FCY access. FEBCs expanded under Zia.
1991-1998, The PERA era. Apparent freedom. $11 billion accumulated. $11 to 21 billion in capital flight.
May 28, 1998, The catastrophic freeze. Every PERA guarantee broken in one day.
1999-2007, Musharraf reconstruction. Post-9/11 remittance surge. Reserves rose to $16 billion.
2008-2018, Crisis cycles. Multiple IMF programmes. Capital flight at $9 billion a year.
2018-2022, The FATF pressure era. Grey list. Compliance reforms. $38 billion in lost GDP.
2020-2024, The Roshan Digital Account era. $12.426 billion accumulated across 917,400 accounts.
2022-2023, Near-default. Reserves below $3 billion. Inflation peaked at 38 percent.
2023-2026, The current framework. ESFCA at 50 percent retention. Form R eliminated. Fundamental restrictions intact.
Each phase makes sense only against the background of the one before it. Read in sequence, the seventy-six-year arc reveals a pattern that no individual phase reveals on its own.
1947-1959: The inherited sterling system
Pakistan's foreign currency story does not begin at independence. It begins with the colonial framework Pakistan inherited.
When Pakistan became independent in August 1947, it adopted the British Foreign Exchange Regulation Act of 1947 in full. FERA became the foundational piece of legislation governing foreign currency for decades. Pakistan was part of the Sterling Area until 1971, meaning its foreign exchange policies were largely subordinated to British monetary management for the first twenty-four years of its existence.
One fact about this period is consistently absent from Pakistani discussions of foreign currency policy. Britain itself maintained similar restrictions on its own citizens. From 1939 until 1979, a forty-year period, British citizens could not freely hold foreign currency, could not open foreign currency accounts at will, could not take pounds out of the country beyond strict limits, and could not buy foreign property without approval. The British travel allowance for citizens going abroad was limited to fifty pounds per person per year as late as 1966. So when Pakistan inherited FERA in 1947, it inherited a framework the British were also using on themselves.
The critical difference was experiential. Britain had a reserve currency. Decisions were made in London. British citizens were roughly equally constrained. Pakistan held sterling reserves that were not its own, was subject to rules made elsewhere, and faced immediate class differentiation in implementation.
From day one of independence, certain categories had access to foreign currency that ordinary citizens did not. Foreign diplomatic missions had unrestricted access by Vienna Convention. Foreign companies operating in Pakistan had operational accounts in their home currencies. Pakistani diplomatic personnel abroad held foreign accounts during their postings. Approved import-export traders had Letters of Credit and operational FCY access. Senior bureaucrats on official duty received foreign currency travel allowances. Military officers in foreign training had allowances and procurement responsibilities. Government scholarship students had foreign currency stipends. Hajj pilgrims had a limited annual allowance.
For the vast majority of Pakistanis, farmers, traders, workers, professionals, small businessmen, the rules were severe. Holding foreign currency in any form was prohibited. Opening foreign currency bank accounts was forbidden. Receiving foreign currency required immediate surrender to the State Bank. Penalties included confiscation, fines, and imprisonment up to seven years.
Capital flight, however, never stopped. Across the 1947 to 1959 period, annual flows of approximately $120 to $295 million left Pakistan through trade mis-invoicing, smuggling, pre-existing offshore wealth movements, banking channel manipulation, diplomatic and military commissions, and Hajj or medical or education channels with inflated allowances. The cumulative twelve-year flight was approximately $1.5 to $3.5 billion in 1950s dollars.
By 1959, Pakistan had established a pattern that would persist for seventy-six years. Restrictions worked perfectly for ordinary Pakistanis. Restrictions did not work for those with connections, capital, or institutional access. The same legal text produced opposite outcomes for different classes. Trade-based laundering began at industrial scale. Hawala networks handled the rest. This was not Pakistan's failure to implement an inherited system. It was the system being implemented exactly as the elite needed it to be.
1959-1971: Limited opening under Ayub
Under Ayub Khan's regime, Pakistan made its first formal acknowledgement that overseas Pakistanis needed banking services. Non-Resident Foreign Currency Accounts (NRFCAs) were created during the Ayub era, specifically for Pakistanis working abroad (initially seamen, later Gulf workers), foreign nationals living in Pakistan, and foreign-owned businesses.
For resident Pakistanis, the rules remained essentially unchanged from the 1947 to 1959 period. They could not legally hold foreign currency. They could not open FCY accounts. They could not save in dollars during periods of rupee weakness. They were subject to surrender requirements when receiving foreign currency.
This was the era of Pakistan's "decade of development". The economy grew, but industrial concentration created the famous "twenty-two families". Class differentiation hardened. The banking sector consolidated around political and industrial families. Foreign exchange controls remained tight for ordinary citizens while implementation flexibility grew for the elite.
The 1959 NRFCA framework was small but historically important. It created formal infrastructure for FCY accounts within Pakistani banks. It established that such accounts were possible to administer. It built the institutional capability that would later be massively expanded. It set the precedent for class-based FCY access.
The infrastructure built in this period would be inherited by every subsequent reform, including, eventually, the 1991 PERA expansion and the 2020 Roshan Digital Account programme.
Capital flight continued. The methods established in the 1947 to 1959 period kept operating at approximately $150 to $400 million per year across all channels combined. The 1965 war heightened smuggling networks. Industrial expansion meant more import LCs to manipulate. The foreign aid era brought commission structures on aid-funded projects. The 1971 war created massive disruption and new opportunities for cross-border wealth movement during the chaos.
The loss of East Pakistan in 1971 ended this phase. Pakistan exited the Sterling Area. The reserves position deteriorated dramatically. Political and economic restructuring under Bhutto began. FCY policies tightened severely in response.
1971-1985: The restriction era
After the loss of East Pakistan, Pakistan entered its most restrictive period for foreign currency. Bhutto's bank nationalisation, foreign exchange crises, and severe controls defined the era. Yet, paradoxically, this is also when the legal infrastructure for elite wealth flight began being formalised.
Pakistan's foreign exchange reserves hit a record low of $96 million in January 1972, the lowest in the country's history. This was triggered by the loss of East Pakistan and its export contribution, war debts and reconstruction needs, international isolation, refugee burden, and loss of investor confidence.
In 1972 to 1974, Zulfikar Ali Bhutto's government nationalised all major banks. The state now directly controlled banking. Foreign exchange decisions became more political. Restrictions tightened across the board. Even the elite faced new scrutiny briefly. Foreign banks scaled back operations.
In 1973, the Pakistani government introduced one of its most consequential financial instruments. Foreign Exchange Bearer Certificates (FEBCs) were government-issued bearer instruments denominated in foreign currency. Anonymous holders. No identity required. Tax-free. Could be encashed in dollars or rupees. Initially small in scale.
The significance of FEBCs cannot be overstated. They were the first government-created legal money laundering instrument in Pakistani history. They established the principle that anonymous foreign currency holding was acceptable, but only through specific government channels that the elite could navigate.
During this period, with formal channels heavily restricted, hawala networks reached peak operations. Sixty to eighty percent of Pakistan's remittances came through hawala, not banks. Total hawala flows in both directions reached $3 to 5 billion per year by the late 1980s. Lahore, Karachi, Dubai, and London became major hawala hubs. Trust networks operated at industrial scale.
The Soviet-Afghan war beginning in 1979 had profound effects on Pakistani capital flows. Massive smuggling networks were established along the Afghan border. The drug economy created new laundering channels. US and Saudi aid flows brought commission opportunities. Heroin trafficking generated dollar income that flowed through Pakistan. Border smuggling routes carried wealth, not just goods.
General Zia-ul-Haq's regime (1977 to 1988) marked the transition toward the cautious liberalisation that would peak in 1991. FEBCs expanded aggressively. First steps toward allowing resident FCY accounts began. The banking system rebuilt after nationalisation disruptions. Relationships with Gulf countries expanded, especially Saudi Arabia. Significant remittance growth followed.
Despite the most restrictive policy era in Pakistan's history, capital flight continued at approximately $1 to 3 billion annually through hawala networks (40 to 50 percent), trade mis-invoicing (20 to 30 percent), smuggling of cash and gold (15 to 20 percent), diplomatic and military channels (5 to 10 percent), and FEBCs and other instruments (5 to 10 percent).
The 1971 to 1985 period proves a fundamental point. Even the most restrictive FCY policies in Pakistan's history did not prevent elite capital flight. The methods used informal channels, government-created instruments, smuggling, and trade manipulation. The wealthy moved their wealth out. The masses were trapped in PKR. This pattern, restrictions hurting ordinary citizens while elite finds workarounds, is the most persistent feature of Pakistani FCY policy across all eras.
1985-1991: Cautious liberalisation
In the mid-1980s, Pakistan quietly began allowing resident citizens to hold foreign currency accounts under specific schemes. This was the foundation upon which the 1991 explosion would be built, and an underappreciated period in understanding what came next.
Under Zia-ul-Haq's later years, resident Pakistanis were, for the first time in Pakistani history, legally allowed to hold foreign currency accounts. The conditions were strict. Source of foreign income had to be verifiable. Initially limited to specific sectors, exporters, remittance recipients. Smaller in scale than what would come. Required documentation. Maintained source-of-funds verification.
The Zia government also pushed FEBCs much more aggressively. Anonymous bearer instruments became more widely available. Tax immunity was codified. They could be transferred without registration. They became a parallel currency for elite transactions. By 1991, several billion USD worth was in circulation.
This created a hybrid system. FCY accounts with source verification existed for those with documented foreign income. FEBCs with no verification existed for anyone with cash. The wealthy used both. Ordinary citizens used neither.
Pakistan's reserves recovered modestly during this period. They reached approximately $1 billion in 1985, recovering from earlier crises, but fell to a record low of $176 million by 1990. The 1990 trough at $176 million is critical. It set up the political conditions for the dramatic expansion in 1991. Reserves were so low that any policy promising to bring foreign currency in would seem attractive.
By 1990, several factors aligned for major policy change. Reserves at near-historic lows. Pakistani diaspora growing in the Gulf, the UK, the US. Black money in Pakistan estimated at significant levels. Asian Tigers were the dominant economic narrative globally. Industrial families wanted formal channels to convert black money. Politicians wanted legal infrastructure for offshore wealth.
When Nawaz Sharif became Prime Minister in November 1990, his government inherited the reserves crisis, the existing limited FCY framework, a political coalition of industrial-trading families, an ambitious "Asian Tiger" vision, and pressure to liberalise from international institutions including the IMF and World Bank. Within months, his government would propose what became the Protection of Economic Reforms Act 1992, the most consequential FCY legislation in Pakistan's history.
What is important to understand is that the 1991 PERA was not introducing FCY accounts to Pakistan. They had existed for residents since the mid-1980s. PERA was not introducing anonymous FCY instruments. FEBCs had filled that role since 1973. What PERA did was combine and dramatically expand existing mechanisms while removing nearly all safeguards. It took the limited resident FCY framework and made it unlimited. It took FEBC anonymity and applied it to bank accounts. It took the implicit elite accommodation and made it explicit law.
By the time Nawaz Sharif's reforms passed in 1992, the conditions for both spectacular growth and catastrophic failure were in place.
1991-1998: The PERA era
The Protection of Economic Reforms Act 1992 represented the most dramatic FCY liberalisation in Pakistan's history. For seven years, the country experienced what looked like an Asian Tiger transformation. The reality, examined honestly, was very different from the marketing.
PERA was enacted by Nawaz Sharif's first government and provided extraordinary privileges. Section 4 allowed free movement of foreign exchange in and out of Pakistan. Section 5 provided complete immunity from source-of-funds inquiry. Section 5 also established tax immunity covering income tax and wealth tax. Section 5 guaranteed banking secrecy. Section 9 provided statutory protection from future government interference.
Under PERA, any Pakistani resident could open FCY accounts in any major currency (USD, GBP, EUR, JPY), deposit unlimited amounts, convert PKR to USD freely at the bank, withdraw cash USD on demand, transfer funds abroad without restriction, receive interest tax-free, maintain banking secrecy, and refuse any inquiry into source of funds.
The marketing was compelling. Pakistan was promised it would become an Asian Tiger like Malaysia or Thailand, a magnet for foreign investment, a regional financial hub, an exporter of capital and services, an economic success story. The mechanism was supposed to be: liberal policies attract foreign capital, foreign capital fuels growth, growth generates more foreign currency, virtuous cycle established.
The early numbers looked good. Reserves grew dramatically during the early PERA years, from $176 million in 1990 to approximately $700 million in 1992 (+300 percent) to approximately $2.5 billion in 1994 (+250 percent) to a peak of $7.1 billion in 1996. By May 1998, total deposits in foreign currency accounts had reached $11.16 billion, with 63 percent in the names of resident Pakistanis.
The Foreign Direct Investment reality, however, was modest. Total seven-year FDI from 1990-91 to 1997-98 was approximately $4.1 billion. This was less than half of the $11 billion accumulated in FCY accounts. The mismatch is the key clue to what was actually happening.
While FDI was modest, capital flight was substantial. Conservative estimate: $2 to 3 billion per year. Cumulative seven-year flight: approximately $11 to 21 billion. This exceeded total FDI received by 3 to 5 times. A 2018 analysis indicated PERA 1992 cost Pakistan over $11 billion drained to the western world.
The mechanism was the round-trip. An industrialist deposits PKR 100 million black money in his FCY account. The bank converts to approximately $3.3 million at the 1990s exchange rate. The State Bank of Pakistan records this as a $3.3 million addition to FCY deposits. The industrialist withdraws cash USD or wires to Dubai. The funds purchase property or sit in foreign accounts. The money is now offshore, with full Pakistani legal documentation. Some funds are later sent back as remittance, fully whitewashed. The same money was counted in Pakistani statistics multiple times: as FCY deposit, as remittance, sometimes as FDI when routed through Dubai shell companies.
The phantom reserves problem was the structural flaw. The $11 billion in FCY accounts was not really Pakistan's wealth. It was a liability. The State Bank of Pakistan had agreed to honour these deposits in foreign currency on demand, but it did not actually have $11 billion in actual hard currency. The system worked as long as deposits exceeded withdrawals. Like fractional reserve banking but for an entire country's foreign exchange. One panic event could, and would, drain reserves overnight.
By 1996 to 1997, observers were noticing problems. Reserves growth slowing. Asian Financial Crisis warning signs (Thailand, 1997). FDI flows declining. HUBCO and other Independent Power Producer disputes brewing. Political instability with governments dismissed every two to three years. Smart money already moving out.
By the time of the 1998 freeze, the actual beneficiaries of PERA were clear. Industrial families (Sharif, Saigol, Chaudhry, etc.). Senior politicians from all parties. Military leadership. Senior bureaucrats with offshore connections. Wealthy Karachi and Lahore traders. These groups used PERA exactly as it was designed, to legally launder and export wealth they had accumulated through various means in Pakistan.
The accounts that would soon be frozen disproportionately belonged to working-class overseas Pakistanis sending remittances, small business owners with legitimate FCY savings, retirees who had saved in dollars, middle-class families with documented foreign income, and honest depositors who believed PERA's "no restrictions" promise.
May 28, 1998: The catastrophic freeze
May 28, 1998 is the most consequential date in Pakistan's banking history. In a single decision, the government froze all foreign currency accounts, betraying constitutional protections, destroying depositor trust, and shaping every FCY policy decision for the next twenty-eight years.
The sequence of events was rapid. May 11 to 13, 1998: India conducted nuclear tests, surprising the world and creating intense pressure on Pakistan to respond. May 14 to 27, 1998: International community pressured both India and Pakistan. Significant capital flight from Pakistan as wealthy depositors anticipated potential conflict. May 28, 1998: Pakistan conducted its own nuclear tests in Chagai. The same day, the government froze all foreign currency accounts. May 28 to 30, 1998: $1.3 billion withdrawn from FCY accounts in a panic. The government realised it did not have the dollars to honour the rest.
The freeze mechanics were brutal. All FCY accounts frozen immediately. Withdrawals only permitted in PKR. Government fixed conversion rate at Rs 46/USD, below the market rate. Account holders forced to accept PKR at unfavourable rates. Foreign banks scaled back operations.
Reserves collapsed from approximately $1.3 billion in May 1998 (already low) to $440.4 million in October 1998, a record SBP low. Pakistan had less than two weeks of import cover and was technically bankrupt.
The damage to depositors was severe. Average depositor lost 15 to 20 percent immediately on conversion to PKR. Subsequent rupee depreciation increased losses to 30 to 40 percent. Ten years later, those who had been forced to convert had effectively lost half their wealth. Foreign banks shut Pakistani operations. Massive reduction in foreign reserves cascaded. Major discouragement to foreign investors. Massive increase in foreign debts.
The constitutional violation was unambiguous. PERA had explicitly guaranteed no restriction on holding foreign currency, no restriction on withdrawal, no restriction on transfer abroad, statutory protection from future government interference. All of these were violated overnight on May 28, 1998. A government statute was breached by the same government that had passed it. People who had deposited fifty thousand dollars found they could only withdraw rupees at a government-fixed rate that was below the market rate, losing 15 to 20 percent of their wealth instantly.
This breach has never been formally addressed. There has been no official acknowledgement. No compensation. No prosecution. No structural protection against repetition. The wound remains open.
The distribution of pain was morally devastating. Industrialist families (Sharifs, Chaudhrys, Saigols), senior politicians, military leadership, senior bureaucrats with offshore accounts, wealthy traders with Dubai or UK contacts had been moving wealth out for years through PERA's legal channels. By May 1998, when nuclear tension increased, they accelerated their exits. By the time of the freeze, they were largely protected.
Who got trapped: Working-class overseas Pakistanis sending remittances. Small business owners with legitimate FCY accounts. Retirees who had saved in dollars for security. Students whose families had saved for foreign education. Honest depositors who trusted PERA's guarantees. These were precisely the people the marketing had claimed to be helping.
Faced with the reserves crisis, the government had options: default on international debt obligations, borrow emergency funding from China and Saudi Arabia (some of this happened), negotiate with the IMF on standby terms, or freeze citizens' private FCY accounts. The government chose option four because it was the path of least resistance. Citizens could not effectively sue the government. International creditors could trigger sovereign default, which would have been catastrophic to elite families with international business interests.
The 1998 freeze created consequences that persist today, twenty-eight years later. Trust deficit: no Pakistani fully trusts FCY accounts. Capital flight acceleration: each subsequent crisis triggers more outflows. Permanent restrictions: successive governments have imposed restrictions that all derive from 1998 trauma. Reduced liberalisation: even when reform makes sense, 1998 looms over decisions. Diaspora skepticism: overseas Pakistanis still prefer Dubai or London banks.
But more importantly, 1998 established a precedent. The Pakistani state will protect international creditors and elite extraction over domestic depositors when forced to choose. This precedent has shaped every FCY policy decision since.
1999-2007: Reconstruction under Musharraf
After the 1998 catastrophe, Pakistan entered a period of slow reconstruction. The Musharraf era saw FCY accounts cautiously reopen, but everything had changed. Trust was destroyed. Verification became standard. Then 9/11 transformed everything, creating a temporary boom built on geopolitical luck.
After Pervez Musharraf's coup in October 1999, the new government inherited frozen FCY accounts and broken trust, reserves at near-default levels, international isolation from sanctions, massive external debt, and internal political turmoil.
The initial response was cautious normalisation rather than dramatic reform. FCY accounts were reopened, but with significant restrictions. Source of funds documentation required. Limits on cash withdrawals. Restrictions on transfer abroad. No more "no questions asked" framework. FEBC scheme being phased out.
The September 11, 2001 attacks transformed Pakistan's economic position overnight. Per State Bank of Pakistan analysis, the excess liquidity in the foreign exchange market following the post-September 11 surge in workers' remittance into the formal banking channel induced SBP to purchase US$8.2 billion from October 2001 to March 2004.
Three things happened simultaneously after 9/11. First, US aid resumed and expanded. Pakistan, as the frontline state in the "War on Terror", received direct US military and economic aid totaling $10 to 15 billion over the decade, debt rescheduling at favourable terms, removal of sanctions, and reactivation of IMF and World Bank programmes.
Second, the remittance boom moved to formal channels. Counter-intuitively, the increased scrutiny on hawala (suspected of being used for terror financing) pushed remittances into formal banking. Remittances jumped from $1 to 2 billion per year to $5 to 7 billion per year. Pakistani diaspora was forced into formal channels. The banking system gained massive deposit base. Reserves built up rapidly.
Third, reserve currency liquidity reached unprecedented levels. The combined effect was unprecedented liquidity in Pakistan's foreign exchange market.
The reserves recovery looked spectacular on paper. From approximately $1.7 billion in 2001 to approximately $10 billion in 2003 (5x in 2 years) to approximately $13 billion in 2005 to approximately $16 billion in 2007 (decade peak). This was a tenfold increase in six years, but largely driven by external geopolitical developments, not structural reform.
The hidden pattern of 1999-2007 set the architecture for what would follow. External-dependence model: Pakistani reserves growth came from US aid, not structural exports. Borrowed prosperity: much of the reserves were debt or aid, not earned. Vulnerability hidden: the system would fail again when external conditions changed. Elite continuity: the same families that had been moving wealth out continued doing so, just through new channels.
When examined closely, Pakistan's reserves at $16 billion in 2007 were impressive on paper but contained approximately $5 billion in IMF, World Bank, and ADB borrowing, approximately $3 to 4 billion in direct US aid impacts, approximately $3 to 4 billion in bilateral support from Saudi Arabia and China, approximately $2 to 3 billion in genuine remittance growth, and approximately $1 to 2 billion in actual export earnings retention. The "earned" portion of reserves was small. Most of the $16 billion was external dependence in various forms.
The Musharraf-era prosperity was real but borrowed, both literally (debt) and figuratively (geopolitical luck). When conditions changed, the structure would prove fragile.
2008-2018: Crisis cycles
The decade after Musharraf's exit was defined by repeated crises, brief recoveries, and the underlying continuity of the elite extraction system. CPEC investment created another reserves peak, but underlying structural problems persisted.
The PPP government from 2008 to 2013 faced multiple crises. Global financial crisis (2008). Energy crisis at home. Worsening security situation. End of Musharraf-era US aid surge. Floods in 2010 and 2011. Reserves fluctuated between $10 and $17 billion during this period, requiring multiple IMF programmes and bilateral support packages.
In October 2013, then-SBP Governor Yaseen Anwar made a remarkable public statement. Over $9 billion is illegally remitted outside Pakistan annually. This $9 billion figure, announced by Pakistan's own central bank governor, has become the standard reference point for capital flight estimates.
Under Nawaz Sharif's third term (his political comeback), the China-Pakistan Economic Corridor brought significant Chinese investment. CPEC promised approximately $25 billion in initial investment, with projections of $60 billion or more over the decade.
Reserves hit an all-time high of $24.026 billion in October 2016, driven by Chinese investment inflows, bilateral support from Saudi Arabia and the UAE, Eurobond issuances at favourable rates (global rates were near zero), continued strong remittances, and some genuine export growth.
By 2017 to 2018, problems were emerging. CPEC machinery imports surged, widening the current account deficit. Exports stagnated. Political instability returned with Nawaz Sharif's disqualification. Reserves began declining, reaching under $10 billion by mid-2019.
Throughout 2008 to 2018, FCY policy continued the post-1998 pattern. Documentation requirements gradually tightened. Tax filer status linked to FCY access. Source-of-funds verification standardised. Limits adjusted in response to crises. No fundamental reform attempted.
Under the new Imran Khan government in 2018, important reforms were attempted. Source-of-funds requirements significantly tightened. Tax filer status required for substantial FCY access. Front-men feeding FCY accounts of influential people targeted. Some PERA-era loopholes addressed. These reforms hurt small users more than they hurt the elite (whose wealth was already offshore), but they did represent a structural tightening.
The 2008 to 2018 decade demonstrated the persistent pattern. External support enables reserves growth. Reserves peak coincides with import surge. Current account deficit worsens. External support reduces or reverses. Reserves crash. Crisis triggers IMF programme. Conditions impose pain on productive class. Elite is largely unaffected (already offshore). Cycle repeats. This boom-bust cycle has played out at least four times since 1991. Each time it ends with new restrictions on productive citizens while elite wealth flight continues through alternative channels.
One important development during this period was the emergence of Pakistan's IT industry. IT exports grew from approximately $1 billion in 2010 to approximately $2 billion in 2014 to approximately $3 billion in 2018. This growth happened despite, not because of, FCY policies. IT entrepreneurs were learning to work around restrictive banking rather than waiting for reform.
2018-2022: The FATF pressure era
When Pakistan was placed on the FATF grey list in June 2018, it created the most external pressure on Pakistani financial policy in decades. The reforms that followed showed both what is possible under pressure and what gets quietly preserved despite reforms.
Pakistan was placed on the FATF grey list in June 2018 due to terror financing and money laundering concerns. The required compliance measures included stricter source-of-funds verification, better KYC requirements, cross-checking with tax records, investigation of suspicious transactions, beneficial ownership tracking, and effective sanctions for non-compliance.
The grey list placement was costly. Estimates from various sources suggest approximately $38 billion in lost GDP over the grey list period, reduced FDI inflows, higher borrowing costs internationally, banking restrictions in correspondent relationships, and lost trade opportunities.
Under pressure, Pakistan implemented several real reforms. The 2020 SRO on FCY accounts was particularly significant. The federal government issued rules pertaining to foreign currency accounts based on PERA 1992. Per the document issued by the finance ministry: a foreign currency account of an individual may be credited with the remittances received from abroad through banking channel except payment for goods exported from Pakistan. This effectively ended the rupee-to-dollar conversion pipeline that had enabled the worst money laundering, the kind that operated through PERA's original framework.
Other reforms included improved beneficial ownership disclosure, strengthened Anti-Money Laundering Act enforcement, increased trade-based money laundering monitoring, pressure on hawala and hundi networks, and tax filer status linked to financial access.
Despite FATF pressure, several PERA-era loopholes survived. Section 111(4) tax immunity for foreign remittances. Banking secrecy provisions. Discretionary approval systems. Two-tier implementation patterns. Asymmetric treatment of importers versus exporters. The reforms that hurt small users (KYC, documentation) were implemented thoroughly. The reforms that would have exposed elite wealth (offshore disclosure, beneficial ownership transparency that crossed jurisdictional lines) were implemented superficially.
Pakistan was removed from the FATF grey list in October 2022 after four years of compliance work. The removal was significant because it restored some banking relationships, reduced international scrutiny, marginally improved investor perception, and ended the explicit cost of grey-listing. But it also meant that some compliance pressure relaxed, and several reforms began being quietly de-emphasised.
The 2018 to 2022 period demonstrated four important things. External pressure works partially. When forced, Pakistan can implement compliance reforms. Reform without restructuring is incomplete. The PERA framework's most damaging features survived FATF scrutiny. Costs fell on small users, not elite. The compliance burden was felt by ordinary citizens, not those with offshore wealth. Real fix requires sustained pressure. Once grey-list pressure ended, some progress quietly stopped.
By the time Pakistan came off the grey list in October 2022, another crisis was already developing. Imran Khan's government had been removed in April 2022, political instability was acute, and reserves were declining rapidly. The next phase would be one of the most acute crises in Pakistani history and would test whether the trust rebuilt during 2018 to 2022 would hold.
2020-2024: The Roshan Digital Account era
In September 2020, Pakistan launched what would become its most successful FCY product since 1998. The Roshan Digital Account programme demonstrated that trust could be partially rebuilt and showed what is possible when policy actually serves the diaspora's needs.
The Roshan Digital Account was launched in September 2020 by the State Bank of Pakistan with the following features. Target audience: overseas Pakistanis (NICOP/POC holders). Currencies: USD, GBP, EUR, AED (later expanded). Opening process: fully digital, no Pakistan visit required. KYC: remote verification through NADRA. Operations: internet banking, mobile apps, debit cards. Repatriation: free, no SBP approval needed. Investment options: Naya Pakistan Certificates (USD bonds), stocks, real estate, mutual funds. Interest rates: 4 to 5 percent on USD when global rates were near zero.
The numbers as of March 2026 are remarkable. Cumulative inflows since launch: $12.426 billion. Total accounts opened: 917,400. Countries available in: 175 plus. Net repatriable balance: approximately $2 billion. Monthly inflows (recent): $200 to 260 million. Average annual inflow: approximately $2 billion.
What made RDA different came down to three factors. First, trust-building design. The product was designed specifically to address the trust deficit. Free repatriation guaranteed. No conversion requirements. Multiple currency options. Sovereign backing. Consistent honouring of commitments.
Second, digital-first approach. NADRA verification eliminated branch visits. Mobile banking provided ongoing access. Investment products integrated directly. Real-time transaction processing.
Third, crisis test survived. The most important validation came during the 2022-2023 crisis. Even when Pakistan came within weeks of default and reserves dropped below $3 billion, RDA accounts were never frozen. Repatriations continued normally. No restrictions imposed. Government publicly committed to honour obligations. Trust held.
Despite its success, RDA has significant limitations. Only for overseas Pakistanis: resident Pakistanis cannot access except in specific cases. NICOP/POC required: excludes Pakistani-origin foreign citizens without these documents. Limited currencies: missing SAR, CAD, AUD despite significant diaspora populations. Investment caps: some products have substantial minimums. No general business use: not designed for IT companies, exporters, etc.
The RDA's success demonstrates several important things. Trust can be rebuilt when commitments are kept. Digital infrastructure works in Pakistan when properly designed. Diaspora wealth can come home when products are competitive. Sovereign backing matters for confidence. Reform is possible when political will exists.
The RDA proves that the broader FCY restrictions are not technical necessities. They are policy choices. When Pakistan wants to make a particular product work, it can. The question is why this approach has not been extended to other productive sectors.
The success of RDA suggests massive untapped potential. If extending the RDA model to IT companies and freelancers, goods exporters, service exporters, resident professionals with foreign income, and tax-filing residents could capture an additional $5 to 15 billion annually in productive class earnings currently held offshore. This is the foundation for the reform proposed in The Productive Capital Account: a reform proposal for Pakistan's FCY system.
2022-2023: The near-default period
In late 2022 and early 2023, Pakistan came closer to default than at any time since 1998. The economic crisis tested whether the post-FATF reforms had built genuine resilience and revealed that emergency support, not structural strength, prevented catastrophe.
Several factors converged in 2022. Imran Khan's government overruled SBP advice on subsidies (early 2022). Russia-Ukraine war spiked global oil and food prices. Imran Khan removed from office (April 2022). Political crisis created uncertainty. IMF programme suspended due to subsidy violations. Capital flight accelerated. Currency began rapid depreciation.
Reserves dropped to crisis levels. August 2021 (peak): $27.2 billion. August 2022: $13.4 billion (-50 percent). January 2023: below $3 billion. Import cover: less than 3 weeks.
Inflation peaked at 38 percent in May 2023. This was driven by currency depreciation (PKR fell from 175 to 280 plus to USD), imported inflation (oil, food), domestic supply disruptions, reduction of subsidies under IMF pressure, and energy price increases.
In the most acute phase of the crisis, rumours began circulating that the government was considering freezing FCY accounts, an echo of 1998. Per The Express Tribune, June 2022: the SBP and the federal government categorically rejected rumours that they were planning to freeze all foreign currency accounts (FCA), Roshan Digital Accounts (RDA) and safe deposit lockers in Pakistan's banks. The authorities assured the general public that the accounts and lockers were completely safe, and that there was no proposal under consideration to put any restriction on them.
The fact that this denial had to be issued shows how close to 1998 conditions Pakistan was.
Pakistan avoided default through emergency measures, not structural strength. Saudi Arabia: $3 billion deposit rollover. UAE: $2 billion deposit rollover. China: multiple rollovers totaling $4 to 5 billion. Qatar: $3 billion package. IMF: eventually concluded Stand-By Arrangement. Domestic measures: heavy import restrictions, SBP interventions. None of this represented earned reserves growth. It was bilateral support and emergency borrowing.
Several FCY-related restrictions were imposed during the crisis. Strict import LC prioritisation. Effectively dual exchange rates briefly. Limits on USD purchases from open market ($10,000 per day, $100,000 per year per individual). Restrictions on cash USD carrying abroad. Tightened scrutiny of FCY accounts. Account-to-account transfer requirement for foreign currency deposits (November 2025). These measures hurt small users while doing little to address structural extraction.
The 2022 to 2023 crisis revealed several uncomfortable truths. Pakistan's reserves are mostly borrowed. When external support reduced, reserves crashed within months. The 2021 peak was illusory. $27.2 billion looked impressive but was not earned reserves. Productive sector was punished. IT exporters, importers, businesses faced new restrictions. Elite was unaffected. Wealth already offshore, no new restrictions on capital flight. 1998 hangover remains. Even rumours of freeze caused panic.
By March 2026, reserves had recovered to $21.79 billion. But this recovery was driven by continued bilateral support rollovers, new IMF programme ($7 billion EFF), resumption of remittance flow, some import compression, and modest export growth. Not by structural reform of the FCY system that contributed to the crisis.
2023-2026: The current framework
After seventy-six years of evolution, Pakistan's current FCY framework represents an awkward compromise between historical restrictions and modern productive economy needs. The recent reforms show some willingness to change, but the fundamental architecture remains intact.
Pakistan's foreign exchange position as of May 2026: foreign exchange reserves $21.79 billion. Import cover approximately 3.6 months. External debt approximately $130 billion. USD/PKR rate approximately PKR 280. Inflation rate approximately 12 to 15 percent. IMF programme status: active ($7 billion EFF, 2024 to 2027).
The October 2023 SBP EPD Circular Letter No. 17 introduced significant reforms for IT exporters. Retention raised from 35 percent to 50 percent in Exporters Special Foreign Currency Account. $5,000 per month minimum or 50 percent, whichever is higher. Specific IT and freelancer focus.
Per SBP communications in April 2026: Form R requirements eliminated for IT exporters. Single declaration at account opening. Same-day processing of export proceeds. Streamlined documentation.
The current retention rules vary by sector. IT firms and freelancers: 50 percent (or $5,000 per month, whichever higher). General service exporters: 35 percent. Goods exporters: 10 to 15 percent (varies by category). With 10 percent year-over-year NFE growth: additional 50 percent on growth portion (demonstrated growth required).
The critical limitation remains intact. Per Chapter 12 of the SBP Foreign Exchange Manual: no cash withdrawal in foreign currency from ESFCAs is allowed within Pakistan. This single sentence captures the fundamental limitation of the "reform". The retained funds exist as bookkeeping entries, not as freely usable foreign currency.
For an IT company earning $100,000 per month, the current system means $50,000 must convert to PKR (at official rate, with conversion fees). $50,000 may be retained in ESFCA. ESFCA can pay foreign vendors with documentation. Cannot withdraw cash USD for travel. Cannot use for personal needs. Subject to bank discretion on each transaction. Many entrepreneurs maintain offshore structures anyway.
International transactions through Pakistani bank cards face multiple stacked charges. Bank conversion fee: 3 to 5 percent. Federal Excise Duty (FED): 3 to 5 percent. Sales Tax on Services (SST): 13 to 16 percent. Advance Tax (filer): 1 percent. Advance Tax (non-filer): 5 percent. International processing fee: 1 to 3 percent. The final PKR withheld may be up to 40 percent greater than the interbank rate.
For a $100 international transaction at PKR 280 interbank rate: filer pays effectively approximately PKR 350 to 360 per USD (25 to 30 percent premium); non-filer pays effectively approximately PKR 365 to 385 per USD (30 to 37 percent premium). This is what makes basic business operations like Facebook ads, software subscriptions, and foreign tools so expensive for Pakistani entrepreneurs.
The current period demonstrates a pattern of "reform theatre". Headline reforms (50 percent retention) get announced. Symbolic improvements (Form R elimination) get implemented. Fundamental restrictions (no cash USD, no personal use) preserved. Asymmetric treatment (importers favoured, exporters restricted) continues. Marketing emphasises reforms; reality remains restrictive. The result is that P@SHA can claim victory, government can claim responsiveness, news can report progress, while the fundamental experience for productive Pakistanis remains substantially unchanged.
Faced with the gap between announced reforms and practical reality, Pakistan's productive class has continued building offshore structures: US, UK, Estonia LLCs for IT companies. Wise, Mercury, Payoneer accounts. UAE free zone companies for exporters. Singapore subsidiaries for service exporters. Crypto holdings as hedges. Continued relocation to better banking jurisdictions. This represents continuous brain drain and capital drain that incremental reforms are not reversing.
By 2026, Pakistan faces a clear decision point on FCY policy. Path A: continue incremental tweaking, watch productive class continue going offshore. Path B: implement comprehensive reform that captures productive class properly. Path C: wait for next crisis to force change (probable absent reform). Read the case for Path B at the Productive Capital Account: a reform proposal for Pakistan's FCY system.
In closing
Twelve phases. Seventy-six years. One persistent pattern.
The pattern is restriction for the masses, accommodation for the elite, periodic crises that punish the productive while protecting the extractive, and a system that survives every reform attempt because the people who benefit from it sit on the boards that design the reforms.
This is not a story of bad luck. It is not a story of incompetence. It is the story of a banking architecture that was inherited in 1947, modified by every government since, and consistently designed to serve the interests of those who controlled its design.
The historical record matters because it strips the pretence from contemporary debates. When you next hear that "we cannot reform FCY policy because of money laundering concerns", you will know that Pakistan maintained legal money laundering through PERA Section 5 from 1992 onwards while citing the same concerns to deny ordinary earners access to their own dollars. When you next hear that "the rupee will crash if we liberalise", you will know that the rupee has been crashing for thirty years under restrictive policy and that strengthening the productive-class FCY framework would create dollar supply, not demand.
The historical record matters because it teaches the productive class that their experience is not unusual. It is the standard Pakistani experience for any group that did not capture the regulatory state. It teaches that reform happens only when the unrepresented organise to be represented.
The next chapter of this history will be written by whoever decides to write it. We can continue the seventy-six-year pattern. We can break it.
The choice, as it always has been, is ours.
Thank you for reading.
, Asad Baig, Lahore, May 2026
Frequently asked questions
When did Pakistan first allow resident citizens to hold foreign currency accounts? Resident Pakistanis were first legally allowed to hold foreign currency accounts in the mid-1980s under General Zia-ul-Haq's later years. The conditions included verifiable source of foreign income, initial limits to specific sectors like exporters and remittance recipients, smaller scale than what would come, required documentation, and source-of-funds verification.
What was the Protection of Economic Reforms Act 1992 (PERA)? PERA 1992 was enacted by Nawaz Sharif's first government and provided extraordinary FCY privileges. Section 4 allowed free movement of foreign exchange. Section 5 provided complete immunity from source-of-funds inquiry, tax immunity, and banking secrecy. Section 9 provided statutory protection from future government interference. PERA enabled both genuine FCY banking access and large-scale legalised money laundering through round-tripping of Pakistani black money.
What happened on May 28, 1998? Pakistan conducted nuclear tests in Chagai on May 28, 1998. The same day, the government froze all foreign currency accounts. Account holders were forced to convert to PKR at a government-fixed rate of Rs 46/USD, below the market rate. Average depositor lost 15 to 20 percent immediately. Subsequent rupee depreciation increased losses to 30 to 40 percent. The freeze betrayed every protection PERA had statutorily guaranteed.
Why are Pakistan's foreign currency reserves so volatile? Pakistan's reserves are mostly borrowed rather than earned. They consist of IMF and World Bank programmes, bilateral support from Saudi Arabia, China, UAE, and Qatar, Eurobond issuances, and remittance flows. When external support reduces or external conditions change, reserves crash within months, as happened in 1998, 2008, 2018-2019, and 2022-2023.
How successful has the Roshan Digital Account been? By March 2026, the RDA had accumulated $12.426 billion in cumulative inflows across 917,400 accounts in over 175 countries. The RDA survived the near-default crisis of January 2023 without freezes or restrictions. It demonstrates that Pakistani digital banking infrastructure works when properly designed and that trust can be rebuilt by consistent honouring of commitments.
Why did Pakistan get placed on the FATF grey list in 2018? Pakistan was placed on the FATF grey list in June 2018 due to terror financing and money laundering concerns. The grey list cost Pakistan an estimated $38 billion in lost GDP, reduced FDI inflows, higher international borrowing costs, and disrupted correspondent banking relationships. Pakistan was removed from the grey list in October 2022 after four years of compliance work.
What is the current ESFCA retention rule for IT exporters? Per the October 2023 SBP EPD Circular Letter No. 17, IT firms and freelancers can retain 50 percent of their earnings in an Exporters Special Foreign Currency Account, or $5,000 per month, whichever is higher. Cash USD withdrawal from ESFCA is not permitted within Pakistan. The remaining 50 percent must convert to PKR upon receipt.
How much capital has left Pakistan illegally? SBP Governor Yaseen Anwar stated in October 2013 that over $9 billion is illegally remitted outside Pakistan annually. Estimates of cumulative Pakistani offshore wealth range from $100 to 150 billion across all asset classes, including approximately $13 billion in Dubai residential real estate documented by the OCCRP "Dubai Unlocked" investigation in May 2024.
Has Pakistan ever come close to default on its foreign currency obligations? Pakistan has come close to default multiple times: 1998 (post-nuclear tests, reserves at $440 million), 2008-2009 (global financial crisis), 2018-2019 (post-CPEC import surge), and most recently January 2023 (reserves below $3 billion, less than three weeks of import cover). Each crisis was averted through emergency external support rather than structural reform.
What is Pakistan's current foreign currency framework as of 2026? The 2023-2026 framework includes ESFCA retention at 50 percent for IT exporters and 35 percent for general service exporters, elimination of Form R requirements (April 2026), single declaration at account opening, and same-day processing of export proceeds. The Roshan Digital Account remains the most successful product. However, fundamental restrictions on cash USD withdrawal and personal use remain intact.
Notes and sources
Foreign Exchange Regulation Act 1947 (inherited from British colonial framework)
Protection of Economic Reforms Act 1992, Sections 4, 5, and 9
State Bank of Pakistan, Annual Reports 1990-2024
State Bank of Pakistan, EPD Circular Letter No. 17 (October 2023)
State Bank of Pakistan, Foreign Exchange Manual, Chapter 12
Yaseen Anwar, Governor SBP, public statement on illegal remittances (October 2013)
Federal government FCY rules issued by Ministry of Finance (2020)
The Express Tribune coverage of FCY freeze rumour (June 2022)
World Bank Pakistan Country Update 2025
OCCRP "Dubai Unlocked" investigation (May 2024)
A.F. Ferguson submission to Pakistan Supreme Court on UAE-held assets (September 2018)
Roshan Digital Account performance data (March 2026 SBP figures)
2018 academic legal analysis of the AMLA-PERA contradiction
2018 tax compliance analysis on Section 111(4) whitewashing
Atlas of Offshore World data on Pakistani assets in London and Singapore
Income Tax Ordinance, Section 111(4)
Anti-Money Laundering Act 2010
A complete source list with citation numbers appears in the longer investigation, The Foreign Currency Account Question in Pakistan: A Forensic Investigation, 1947 to 2026.
Related reading from Asad Baig
How Pakistan's FCY System Costs the Productive Class $25-36 Billion a Year
What India, Singapore, UAE, Malaysia and Bangladesh Do That Pakistan Refuses To
The Productive Capital Account: A Reform Proposal for Pakistan's FCY System
May 28, 1998: The Day Pakistan Froze All Foreign Currency Accounts
The Roshan Digital Account Explained: Why It Worked When Other Reforms Failed
Asad Baig
