US, South Asia and China
The end of the Cold War has brought about a flourishing relationship between the US and the billion and a half people of South Asia, albeit on a pro-rata basis with India as the priority. People in this region value human rights, oppose terrorism, and want to protect their increasingly endangered environment. Free markets in South Asia are relatively new, but economic reform has strong intellectual support, and a growing middle class is committed to opening the economies of the region. A little over a decade ago South Asia was regarded by the United States as a third-class backwater, today it stands on the brink of becoming a major economic and military power. The dependance of many multinational firms a the service sector has made India (and increasingly other regional countries) a permanent priority to American policy makers.
India Shining?
Show-cased as an annual event, the ”India Economic Summit” of the “World Economic Forum” offers a tremendous networking opportunity for both foreign and Indian businesses, providing a rare encapsulated insight into new products and developments for participants. India’s high growth rate is sustained and force-multiplied by foreign direct investment (FDI), a combination of western entrepreneurs, non-resident Indians (NRIs) and dynamic local industrialists and businessmen taking good advantage of the vastness of India and its teeming population. While the talent and expertise exhibited by both the public and private sector are impressive, the major components of the booming economy include “Information Technology” (IT), and “Outsourcing”. The opening of the aviation sector has initiated another surge, new private airlines adding more and more aircraft as passengers turn for long hauls from trains and buses to the air. With public-private sector investment in roads and highways, multiple number of high-rises are being constructed in many cities and towns, force-multiplying the economic boom.
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.
Horse Trading
One of South Asia’s problems is the ridiculous claim that our democracy is moulded according to the “genius of the people” while in actual fact it is an imperfect electoral exercise that is copied from western models with very little relevance to the local environment. This type of democracy bedevils good governance, particularly because the low rate of literacy provides opportunity for a high rate of malfeasance. The voters in India having given a mixed verdict, parties and individuals in a “hung Parliament” have been engaged in compromising ethical principles in the scramble to acquire the seat of power. The commonly used term for this ambiguous post-electoral exercise is “horse-trading” and except in Sri Lanka, which delivered a complete mandate for change, things are the same in Pakistan, Nepal, India and in the near future will most probably be the same in Bangladesh. With every passing election, the verdict of the electorate is increasingly being blatantly corrupted, with a commensurate loss of public confidence in the electoral process. The crossing of the ideological floor is not confined to post-election power plays only, candidates and parties now search for each other pre-election to determine the best electoral winning combination. One begins to wonder whether a commitment to any party line can survive serving the motivated interests of one’s personal self, materially more important than ideology.
A hung Parliament sets in motion forces that are morally repugnant to the exercise of the free vote. To attain a majority Atal Behari Vajpayee’s BJP government is now engaged in a scramble to influence smaller parties and individuals, who on their part want a binding commitment from the would-be suitors for their special interests or more directly, money and lots of it. This democratic farce of “horse-trading”, is not confined to India or South Asia but is a common practice in most third world countries. Accountability, which is at the heart of the democratic process, is lost at the very outset when stepping into the governance mode. Having violated ethical principles and compromised on election promises to accommodate potential allies in reaching for power, the incumbents are ill-suited as responsible mentors of any exercise in accountability. The result is that increasingly governments rely on the rewards of corruption for survival. In some countries it has become a socially acceptable thing to be blatantly corrupt i.e. the Marcos Syndrome where the rulers brazenly flaunt illegal wealth knowing that a significant part of the gullible public will keep on believing their denials about corruption. Faced with retribution in various forms if they do not conform, senior government functionaries are now finding it more profitable to join in with the loot, some even falling over themselves to ingratiate themselves with the political rulers by teaching them how to increase their looting of the public till while carefully skirting around the laws of the land. A democracy without accountability is akin to dictatorship, a dictatorship that does not compromise on nepotism and corruption would then logically be better than such a democracy. Given that dictatorship almost never accepts accountability about itself, the whole thing slides into a Catch-22 situation.
Entering the 21st Century
Within striking distance of the 21st Century, one must take stock of the situation whether we as a nation are going to enter it better or worse than we are today or we were yesterday. Saleem Ahmed, an Engineering Consultant by profession and a close friend, raised this philosophical question at another friend’s 50th birthday as to whether our children would hope for the same quality of life in the next 50 years that we have been privileged to enjoy for the past half century? For the most part, the answer is both yes and no, with sometimes a mixture of both. While the high tech available in the modern world is very much present in Pakistan, it is mainly in consumer necessities meant for the rich, it is in basic necessities that we are rapidly losing ground.