• Home
• Video
• Books by Ikram Sehgal
• About

Overcoming the FX Crisis, Pragmatically

Brutally expressed, there is no further credibility left in our written sovereign commitments. That erosion of confidence has seen a massive outflow of US dollars as witnessed by the depreciation of the Pakistani Rupee, the difference being unofficially upto Rs 9 at one time. From May 28 onwards there has been a series of ill-considered initiatives, starting with the deep-freeze of all foreign exchange accounts, that has undercut Pakistan’s future as a guarantor of any financial agreement or transaction. The net result is that inward foreign exchange remittances have mostly dried up, at least along the legal route and in the present environment, and for the foreseeable future, because no one is going to trust Pakistan’s word. The crucial element in the gameplan to the sanctions was remittances by expatriates, these will not be forthcoming anymore, unfortunately that confidence flow has dried out.

Why did things come to such a pass? Unfortunately out of the US $ 11 billion that came into the foreign currency accounts since 1992, almost 70% was used up by the Benazir-Zardari government. What the Caretaker Regime inherited in late 1996 was almost a bankrupt kitty, in turn they passed on only a few weeks of foreign exchange reserves to the Nawaz Sharif regime in 1997, about US $ 300 million only and that took some doing by Shahid Javed Burki who was looking after the Finance portfolio in the Caretaker regime. Fresh remittances and austerity measures had built up the Reserves to US$ 1.5 billion over the past 18 months. It is now a fact that withdrawals of almost US $ 150-200 million from May 23 onwards convinced the government that the nuclear blast would cause panic withdrawals because of the anticipated economic sanctions. The result was the imposition of emergency and the deep freeze of all foreign currency accounts. As a temporary measure it could have been overlooked by the investing public but when it became apparent that the government wanted to Rupee-fy the deposited US dollars on GoP terms, the public confidence rapidly eroded. Since then the erratic course followed has been a multiple disaster for the country. Since credibility is a must factor for those seeking to establish financial havens, we are a non-starter in this category. As this article goes into print, the zigzag policy persists and as Maxim suggested in last week’s (Saturday July 4) cartoon in THE NATION, someone would have to be mental to send money into Pakistan.

Even at the best of times Pakistan needs a consistent flow of inward remittances, the imposition of sanctions has created both physical and psychological impediments making it the worst of times. The stoppage of inward flow has now made the situation critical, making our dependence on IMF and World Bank instalments of life-saving importance for this country. So instead of breaking loose from dictated shackles we are actually pleading to become dependant, at the mercy of the very nations that are imposing the sanctions. On their part they must be counting the cost of taking us to the cleaners, the social upheaval may lead to absolute anarchy and we may become an international basket case in an already troubled region. That instability may well spread and become a general conflagration with nuclear overtones. The conclusion is that the west may well take us to the brink before saving our bodies while mortgaging our souls. In the circumstances we have to work out a pragmatic foreign exchange policy. To start with let us restore the confidence of those who had deposited money in Pakistan, this has to be done knowing that we do not have enough US dollars to pay them. If I were Mian Nawaz Sharif and I had to save the country (not to mention my government) I would announce the following immediately.

FIRST, anyone who wants to take out foreign exchange from his/her foreign exchange accounts may do so in Pakistani Rupees at the prevailing kerb market rate of the day, with the proviso that State Bank of Pakistan (SBP) will reimburse the commercial banks for the difference. To ensure that commercial banks do not turn it into a lucrative business for them as profit, SBP already has obtained the levels of deposits. This will ensure that the depositor feels he or she has not been shortchanged/looted by the Government of Pakistan and he can take out all his/her money and change it on the same day from the money lenders so as not to lose in the exchange. SECOND, instead of inflicting punishment by giving them far below the kerb rate, let us reward the persons who opened foreign currency accounts pre-May 28. If the person keeps the foreign exchange funds in his/her account as was the balance prevailing on May 28, then as an incremental to that balance he/she should get an incentive of 5% mark-up in addition to the mark-up prevailing in the first year escalating to 7.5% in the second year and 10% in the third year. THIRD, all expatriate Pakistanis bank accounts must be unfrozen and allowed free transactions. Those who open a new bank account abroad in any Pakistani commercial bank abroad should get a simultaneous bank account in any Pakistani commercial bank of their choice in Pakistan with the proviso that the person is able to draw against his/her account in US dollars either within the country or abroad, that will be a powerful guarantee of protection of his/her hard earned money. FOURTH, persons earning blue collar/white collar wages and opening such account will be given a “wage earners card” based on his/her employers certificate that gives the level of his salary and allows him to send money to his kith and kin at home at the kerb rate of the day plus bonus incentives in customs duty drawbacks on personal baggage based on his/her remittances. The banks must devise a system which allows payment to be delivered to the home of the sender within 3 hours of deposit abroad, night or day or at the time specified by the sender. The commercial bank must be given Rs 1.00 extra for every US dollar thus giving their sales people incentive to actively obtain the wage-earners business as well as some incentive for the wage-earner. FIFTH, exporters must get their export proceeds in the form of Pakistani Rupees at the official rate and Bonus Vouchers amounting to the difference between the kerb rate and the official rate on the date of encashing documents. These Bonus Vouchers which can be sold/purchased in the market can only be used to pay customs duties, excise duties, and sales taxes. This will give exporters an incentive without making our imports costlier.

What signals are we sending with the policy aforementioned? FIRST, we are restoring the confidence in the credibility of Pakistan’s sovereign guarantees by imposing a self-restraint on future urges to “nationalise” foreign exchange. SECOND, the depositors who had money in accounts pre-May 28 would get the float rate and thus would not feel looted, rather because of enhanced mark-up becomes somewhat of a privileged lot thus restoring their confidence, they may not even withdraw the money. THIRD, a legal alternative to the Hundi System can be developed by being pragmatic in policy and implementation and FOURTH, give a boost to our exports without affecting our imports but by having a Bonus Voucher Scheme and allowing trade in it, give some incentive to the importer/manufacturer in respect of a mechanism to reduce duties by purchasing these Bonus Vouchers at less than the market rate.

Sure there are ways that this system can be circumvented and even misused but a judicious application of checks and balances can ensure practical monitoring to ward off unscrupulous speculators. What Pakistan needs today is a comprehensive attempt at restoring confidence among the public without losing one’s shirt by panicky withdrawals against US dollars that we don’t have in the first place, our rulers post-1993 having spent it all. At the same time this is a direct incentive-oriented approach to attract our expatriates to send money through the official system. In time the difference between the official and kerb rate will not be more than Rs 1 to 2 and that is an acceptable disagio. In any case the unofficial system practically devalues the Rupee without commensurate benefits to the country. Once we have a credible system in place with built-in transparent guarantees in place, an appeal to patriotism will see Pakistanis abroad respond positively in a deluge of much needed foreign exchange.

Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.