Economic Wilderness
In keeping with the financial mismanagement of the 50 years plus of this nation’s existence, the economic numbers simply do not add up. To be fair to the military regime, the massive siphoning off of public sector funds into private sinecures has been contained at the macro-level while the quantum of leakage at the micro-level seems to go on unabated has even increased because of the “risks” of being “nabbed”. Pakistan is in a Catch-22 situation of obtaining more and more loans to make repayments, without having the means to avoid further slide into an ominous debt trap. The quicksand is of our own making, with no or little help from the obdurate policies of world financial institutions and the lack of a spine among our financial negotiators. Our Finance Ministry has been grovelling before the IMF both in public and private for measly amounts which the IMF dangles before us but does not disburse. The flight of capital has assumed alarming proportions, a mass migration of talent and expertise going to Canada, if this is not reversed no entrepreneurial potential will be left in the country. Thankfully, our Finance Minister is still smiling in the face of eminent financial apocalypse, maybe he knows something we don’t.
Balancing the Costs
When the Indians went public with their series of nuclear blasts in May 1998, we were already in serious economic straits. This is an enduring legacy of many past governments but more recently a gift of the Bhutto-Zardari combine that ruled over us from 1993 to 1996, the Mian Nawaz Sharif regime has since been fighting a losing battle. The Indian nuclear blasts presented us with an opportunity to come out of the nuclear closet but it was quite clear that the western powers would make us pay an economic price for the luxury of exploding the bomb. Even then, we could have perhaps survived on the strength of repatriation of salaries from Pakistanis abroad but the foreign exchange freeze of May 28 simply blew us apart. In one surgical strike on ourselves we stopped the in-flow of foreign exchange and destroyed our financial credibility for the future almost irretrievably. Take for example, the innovative US Dollar Bond Scheme recently unveiled by the PM, very lucrative but few takers. Not that the in-flow from Pakistani expatriate earnings has been eliminated altogether, it continues on the basis of “Hundi” but that credit is not counted officially in the exchequer’s data, remaining a part of the parallel economy. That the country has not come apart economically is very much because we are kept afloat by the unofficial sector.
Having shot ourselves in the foot with respect to one of the major props of our foreign exchange reserves, economic sanctions imposed on us by the US and other developed nations affected us in varying degree. Thanks to Indian belligerency after their own nuclear explosions, this proforma application by the US and others did not have much enthusiasm. However, if it had not been for China to start with, and then Saudi Arabia, UAE and Kuwait providing critical “bridge-financing” funds, we would have been bankrupt and in default, in fact we are already almost at the end of the grace period. At the same time IMF, bent on extracting its own pound of flesh, set conditions guaranteed to make the common man come out in the streets in violent protest. Such harsh terms would be unacceptable to any self-respecting government in Pakistan, caught in an economic vice, between the devil and the deep sea, we had few choices but to opt either for seeming confrontation or roll over and play dead. One may or may not agree with either Mian Nawaz Sharif or Ms Benazir, as different from each other as chalk from cheese, on any number of counts but they have one feature in common admirable in any leader, both not only have plenty of courage but on vital issues can stand their ground even to the perils of the seats — and their lives. It is only when they take up confrontation on extraneous issues less than a matter of life and death that one questions their judgement. On the core issue of routine IMF conditionalities like raising electricity tariffs, etc Mian Nawaz Sharif took the route of populism, lowering the tariffs by as much as 30%, positioning himself as a champion of the masses. This reduction was also meant to serve as a factor to stimulate the economy by lowering the price of production across the board. That premise fell apart at the altar of the greed of our industrial bosses who have not responded in kind, opting for profit-taking rather than passing on the benefit to the consumer.
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.
Living Beyond Reality
When “everyone” and her uncles were expecting a sanctions-oriented tough budget, the Federal Finance Minister did his usual Houdini-act again. This took the political wind out of the Opposition’s sails and they were left mostly spluttering “Kalabagh.” With unrestrained glee they have been joined by the likes of Jatois, etc i.e. those most likely to be affected by a firm implementation of land reforms. Despite the fact that as Pakistan’s financial guru Senator Sartaj Aziz was symbolically bound in chains, bundled in a sack and thrown into the deep end, he has emerged, wet and shivering perhaps, with a surprisingly liberal but (in the circumstances) enterprising Federal Budget.