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Archive for September, 1998

Reversing the Foreign Exchange Flow

or almost last three decades, the repatriation of money earned by our blue and white-collar workers in foreign lands, known as home remittances, has been a major factor in narrowing the critical gap in our foreign exchange requirements. Through legitimate banking channels we have averaged US$ 2 to 2.5 billion. Whereas the figure through “Hawala” or “Hundi” is much higher, the foreign exchange remains outside the channels, in fact adds to inflation. On May 28, the ill-conceived action of the Mian Nawaz Sharif government of freezing foreign currency accounts (FCAs) put almost a dead stop to remittances through the acknowledged routes and a reverse flow developed, so much so that banks in UAE, particularly Dubai, were alarmed at the surplus cash suddenly coming in bucketfulls from Pakistan. It is conservatively estimated that in the weeks following May 28, at about the time we needed a positive net inflow, as much as US$ 3-4 billion could have flowed out of Pakistan.
In 1975, before Indian PM Indira Gandhi imposed the emergency as much as 70-80% of foreign exchange remittances was made through “Hawala”, at that point of time only 30% of Pakistani home remittances was through “Hawala”. Indira Gandhi put most of the illegal money changers engaged in “Hawala” in jail, and froze their accounts. Thousands of people lost the money they had sent through the “Hawala” route. Since the net spread is only about 8-15%, the returns for this route was taken to be very risky and the net result is that “Hawala” to India is almost non-existent. On the other hand before May 28, 60-70% of workers remittances were through “Hawala” to Pakistan, now the ratio has gone up to almost 95%. On the other hand, for countries like Bangladesh and Sri Lanka, which had almost 100% net inflow through “Hawala”, the ratio is 80% through official channels for Bangladesh and almost 100% for Sri Lanka, i.e. “Hawala” is non-existent. Similarly Philippines has developed a modus operandi that has replaced the previous extremely bad system by investing in new technology.
To give an example of how much the “Hawala” system has taken over, if one makes an enquiry about how the Ambassador to UAE down to the lowest peon in the Embassy have sent part of their pay to Pakistan. Not only do they use the unofficial route themselves, they have full details and knowledge of who the main players in the “Hawala” game are, where their accounts are and who operates the accounts on a day-to-day basis. Enquiries have revealed that the Chief Managers of some nationalised as well as privatised Pakistani banks with lots of branches in Lahore and Peshawar have full knowledge of these accounts in their domain and how they are being operated. To a slightly lesser extent this is also happening in Karachi. In this age of computerisation, massive inflows of funds in and out of accounts in any Branch of any bank are available at the press of a button on the desk of currency managers every morning. As such for anyone to deny that full knowledge of the “Hawala” or “Hundi” runners is available is telling a blatant lie.
The main reasons for freezing all the foreign currency accounts on May 28 were (1) there was no money left in the FCAs, the successive governments, mainly Ms Benazir’s, having spent almost all the US$ 11 billion invested there (2) to avoid declaring bankruptcy, the only way to stop foreign exchange being withdrawn was to freeze the accounts. Having taken such a draconian step that destroyed forever the credibility of not only any succeeding government but that of Pakistan as a sovereign state, the Mian Nawaz Sharif government in a mind-boggling exercise allowed the foreign money changers to operate. In essence while keeping the official FCAs locked up, the government tacitly allowed foreign exchange to be repatriated illegally. Why in God’s name do we need foreign exchange money-changers when there are scheduled bank branches by the hundreds available? Money changers are not required for inward remittances, only outward flows. The movement of money illegally out of the country is bad enough in normal circumstances, in the present economic environment it is a dire threat to national security. Knowing this dangerous aspect some people very influential in the government and close to the seat of power are actively engaged in conniving that Pakistan be drained completely of foreign exchange. At best this could be because of lack of knowledge, at worst collusion to sabotage the economic stability of the nation. Not only are funds flowing freely out of Pakistan, it is in turn encouraging a large “Hawala” market run by these unscrupulous scoundrels to operate without any check. That artificially keeps the difference between the official and “Hundi” rate high, as such today at Rs. 10 per US Dollar, at times as much as Rs 18 to the US Dollar.
If the government is really serious in reversing the foreign exchange flow, Pakistan has to take some concrete steps, viz (1) to restore sovereign credibility and the confidence of those who repatriate money to Pakistan, the FCAs must be de-freezed immediately while requesting FCA depositors not to withdraw more than 10% for the time being in the national interest as well as allowing the FCAs as collateral for loans as was being done previously (2) those who withdraw foreign exchange anyway, to be paid at the “Hawala” rate of the day as available in the money market (3) future remittances to be given Pakistan Rupees at the going “Hawala” rate (4) any bank branch manager and his superior keeping accounts illegally of any money changer/”Hawala” person to also be jailed, special foreign exchange courts be set up in this regard as normal courts will be unable to cope (5) economic intelligence to be beefed up so as to know the new Hawala players and their modus operandi (6) all foreign money changers to be banned and their accounts frozen (7) anyone not complying to be jailed under the emergency as a threat to national security (8) the Philippines system to be studied and investment made in technology, electronic means to be established by the Banks as a Consortium so that money is transferred i.e. debit/credit to the accounts is made simultaneously electronically and money is available to the recipient within minutes if he wants to withdraw any amount and (9) arrangements be made for delivery of money to individual in their houses, if and when necessary.
According to a Swiss Bank survey as much as US$ 100 billion belonging to Pakistanis is on deposit in individual accounts whereas US sources place the figure as high as US$ 75 billion. That is more than double the national foreign exchange debt, why can’t we encourage our people by a mixture of carrot and stick to invest/deposit foreign exchange in Pakistan? If the government of Mian Nawaz Sharif has the will, there will always be a way out of the foreign exchange quagmire.

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Black Holes in Revenue Gathering

A recent survey conducted by a research company assisting in the TV Licence Fee Campaign 1998-99 PROJECT VIEWFINDER is very revealing. In the first two months of the campaign, 27% of the people belonging to low-income group area had purchased TV licences whereas 14% of those classified as middle income group and less than 6% of the affluent group had done so. In areas like Defence Housing Authority Karachi, out of 50 houses on one street, nearly every house having a Dish Antenna, only 2 had obtained TV licences and even they had not paid for the Dish Antenna. Amazing as it may seem but those who can afford to spend Rs 250 for a single sandwich at one of the mushrooming fast food outlets are averse to paying Rs.250 as annual fees for a TV licence. On the other hand, at the other extreme the poverty stricken, and this includes the rest of the middle class in the present economic environment, are far more responsible with respect to their public obligations. If you study the proportionate value of the licence fee to the annual earnings of the low-income group and compare it with that of the affluent, the factor of greed and indifference to civic responsibilities among the well-to-do is unimaginable. Analysing the wide discrepancy the company concerned came up with some startling findings, among them viz, (1) those on the poverty line are very concerned about socio-economic facilities, as such they tend to fulfil their obligations far more than the higher income group who take it as a God-given right, their conscience feeling no responsibility towards paying their dues to the State and its agencies (2) the poor income group fear the threat of court summons and police involvement whereas the affluent have no fear of either (3) for the poor the TV licences is another piece of documentation as proof of ownership and occupation of their house while the rich want to avoid such documentation and (4) the prize draw scheme attracts the poor but causes little or no excitement for the affluent who already possess whatever is on offer. These observations are a shameful reminder of the sad lack of social conscience among the affluent. As the last day before penalties and surcharges are applicable approaches, the announcements on TV and print media, encouraging TV set holders to purchase licence, have become slightly tougher in tone. One of the solutions proposed by the collection agencies is also revealing, lists of defaulters are being prepared which are intended to be published in local newspapers. Court summons are also being readied to be sent in an inverse ratio to purchases, affluent income group 10, middle income group 3 and 1 for low income group. Most of those who default, particularly in the affluent group, will probably end up paying even 10-15 times more than the original sum other than the embarrassment and the unnecessary time consumed between court, bailiffs, police station and bank. That experience should be a powerful enough incentive to dissuade them from avoiding taxes and duties in the future, at least the dues against utilities.

Most of this country’s problems stem from the fact that those who have gained most from the largesse of the State do not want to pay taxes but evade them by relying on “bribes and connections” to escape the clutches of the law. The fact that only 1 million or so souls are registered as taxpayers, mostly the salaried class, is a disgrace. At least 3-4 million more taxpayers are evading registration, every one million taxpayer means Rs 100 billion approximately to the exchequer. This is a staggering Rs 300-400 billion direct loss to the public exchequer, more than the debt repayments, defence expenditure and cost of running government all put together. Similarly as regards Sales Tax registration and Central Excise Duty, the evasion is staggering. In Rawalpindi Sales Tax Region alone, over 9,000 units of coal mines, stone crushers and brick manufacturers are not registered, each capable of paying Rs 100,000 annually at the very minimum. This amounts to an evasion of Rs 9 billion. However with the active connivance of tax enforcers, Rs.7,000 per month per unit for NOT registering (a cool approximate Rs.60 million a month or Rs.72 crores per year), very few of the units, if any, are registered and those that are, hardly pay 5% of what they should. The present GST issue is an outrage perpetrated by the PM’s favourite constituency, the retailer business community. Retail shops in all the markets are stocked full of goods, to survive the smallest shop must sell not less than Rs 1,000 per day, in Liberty Market Lahore sales are nearly Rs 3-4 million a day. Similarly jewellery shops sell as much as Rs 5-6 million a day, if not many multiple amounts more. Yet these traders refuse blatantly, not only to pay a fraction of what is actually leviable but refuse to get registered at all. Brazen-faced about their defiance, they are holding the PM and the country to ransom by holding strikes regularly, denying consumers access to necessary consumer items. Rather than succumbing to threats and blackmail, the government should withdraw “law and order” cover from those who do not get registered as well as banning issuance of arms licences to them. If their shops and houses are looted or vandalised, their FIR should not be registered at any Police Station if they are not registered as GST payers. Furthermore one can only assess the amount looted if the GST declaration gives an approximate value. In the same manner what is the proof you own a TV set or VCR unless you have a valid licence? Without the requisite licences they cannot be included in the list of stolen items. This may seem an invitation to loot, anyone who does not subscribe financially to the public exchequer towards maintaining of police cover does not deserve to be secured or protected by the State and that also at the expense of others who pay their dues. The State may well look after them as private citizens but as professionals and their place of work thereof can only fall under the ambit of the State when they start paying their taxes. Moreover the citizenry should be encouraged not to purchase any item from them unless they are registered —and paying GST.

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Why is Pakistan’s unity always under threat?

The one day in Pakistan’s history that symbolizes unity equal to or more than any Aug 14, 1947 is Sept 6, 1965. On that day the whole nation, from Khyber Pass in the North West to Cox’s Bazar in the South East, rose as one person when threatened by Indian invasion, determined to preserve the country’s independence. And yet, little more than six years later, the finest experiment in nationhood in its time was torn apart. Today we are acutely aware that no lessons were learnt from this catastrophe, that anyone who tried to reason was vilified as a prophet of doom and worse, a traitor, no account being taken of the factors (or the people) who destroyed a beautiful country.

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Born-again Muslims

The government of Mian Nawaz Sharif recently moved a Bill in the National Assembly (NA) for the 15th Amendment to the Constitution (popularly known as CA15). Certainly the government could not have chosen a worse time to launch another initiative. On a number of major fronts, the Mian Nawaz Sharif regime has been facing disaster, starting with one certainly not of its making. It is incumbent on any government to maintain control over the tension level, each major initiative has raised apprehensions as well as the stakes, polarising society along the way at a particularly critical time in our history. Has anyone in the regime’s camp heard of such a thing as a “trial balloon?”

A number of major contributing factors encompassing decades of bad governance and malpractice went into the economic crisis that we were immersed in at the beginning of May 1998, culminating in the hands-on looting of the public exchequer during the Asif Zardari-Ms Benazir regime circa 1993-1996. Despite widespread institutionalised reforms and the putting in place of supervisory controls by Mian Nawaz Sharif’s economic team, the economy continued to deteriorate but displayed some early indicators of possible recovery. Then came May 8th and 11th and our world changed overnight. Suddenly we were under immeasurable domestic pressure to counter the Indian blasts and under severe external pressure not to go ahead with a response. As we stood between the devil and the deep sea, the Indians launched a most vicious propaganda campaign, designed to rub our noses in the dirt, to wreck the nation’s morale, “to win a war without bloodying swords,” to quote Sun Tzu. The proliferation of vitriol decided our May 28 nuclear response at Chagai, we were left with no options but to either “eat humble pie” or to “eat grass.”

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