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Efforts to enhance foreign exchange

Our banks have failed to suitably respond to the challenge

Apr 23 - 29, 2001

The Chief Executive, Gen Pervez Musharraf has directed the heads of banking institutions to intensify efforts to enhance foreign exchange remittances by non-resident Pakistanis through regular banking channels. Speaking at a bankers' meeting in Islamabad held to review various economic and financial issues, he reminded them that the gap between total remittances coming into Pakistan and the amount listed through the banks was too wide and needs to be bridged quickly.

The Chief Executive also directed to make an all out efforts by all concerned to persuade Pakistani expatriates to invest their surplus money in Pakistan. He assured the investors that his government will extend all guarantees to ensure the protection of their investment.

Foreign exchange remittances through the banks are gradually dwindling primarily due to the bankers' lethargy and apathy towards legitimate interests of the overseas Pakistanis. The tragedy is that despite tough competition with the clandestine 'hundi' system, our banks have failed to suitably respond to the challenge. No expatriate Pakistani would obviously like to put his family to hardships and humiliation at the banks in Pakistan through inordinate delays and technical wranglings. On the contrary, the 'hundi' operators deliver the money to the addressee at his residence like the Post Office money order. If the Government is really serious to encourage the overseas Pakistanis to send their remittances through the banking channel, it will have to goad the banks to vigorously respond to the challenge. Besides, there is also need to provide a comprehensive package of incentives to the overseas Pakistanis to allure them to invest in Pakistan as well as to make them remit their money through the banks. It is estimated that the expatriate Pakistanis have the financial ability to generate about a hundred billion dollars. It should not be difficult to tap these resources for debt retirement, if the financial institutions' credibility is re-established.

The truth is that freezing of the foreign exchange deposits had caused irreparable damage to the financial institutions' credibility which has to be retrieved, if the country's economic deluge is to be effectively tackled.

Pakistan has been vying for foreign investment during the last decade or so, but inspite of various packages, its performance in attracting foreign investment has been far from satisfactory. The saddest aspect is that not only foreign investment is shrinking, but also domestically mobilised resources are fleeing the country. It is generally believed that almost one half of national economy is undocumented and earning and investment originating from this sector cannot be accounted for. The fear of accountability process has made the capital flee through the well knit, organized and efficient network of money changes and hundi system. We lost the confidence of Overseas Pakistanis who used to keep full or a part of their saving in Pakistan when we freezed their dollar accounts.

Recognizing the need for this money to play a useful role in the economic development of the country, the present government is reported to be contemplating various options to tap these sources of investment. According to the latest indications given by the Finance Minister himself, the government is working on a new plan for overseas Pakistanis to accelerate the tempo of remittances without hindrance. The main elements of the proposed package would include a provision to debar the income tax department from inquiring into the remittance source after receipt of evidence of encashment certificate through normal banking channels. The banks would be asked to extend proper facilities and reinforce the efforts for expediting these receipts. The CBR would be specifically instructed, in unambiguous terms, that such a facility is not a novelty as it had existed since mid 1970s and any harassment to the people would not be tolerated. According to Shaukat Aziz the objective of the proposed package is to increase remittances of foreign exchange earnings by a sizable margin, promotion of investment and transfer of technology.

It is, however, clear that, whatever the phraseology the real intentions of the government exceed the avowed objectives. The remittance of untainted money for either consumption or investment by the overseas Pakistanis was and probably would never be a problem, and the new plan may, of course, motivate the expatriates to invest their savings at home. It is, therefore, obvious that the targeted group would be resident Pakistanis maintaining bank balances abroad in a clandestine manner. The idea behind channelling the money through "overseas remittances" seems to be that if the government had granted a blanket permission to bring in the money without any kind of restrictions and with full immunities, it may have been labelled as money laundering and raised eyebrows in the multilateral institutions. Judged from any standard the proposed measures amount to instituting another money whitening scheme. The federal government decision not to inquire into the sources of finances of the importers of the machinery and buyer of sick units is a last resort to attract investors and revive the economy. The only condition is that the payment has to be made in foreign exchange.

The present government can rightly be accused of deviating from its declared objectives. The twin exercise of tax survey and documentation and the tax amnesty scheme was launched by the present government with the avowed aim of ridding the society of the menace of black money. The importance of these two actions and the government resolve for their successful implementation were repeatedly emphasised by the Finance Minister. Now the question arises what are the factors which forced the government to change its decision to come down heavily upon the black money. With this change, the exercises of tax survey, documentation and accountability will be reduced to a mere shadow boxing.

Obviously the government has been led to change of policy by sheer force of circumstances. At present, there is little chance of economic revival and growth, without accelerating investment which has been stagnating for various reasons, including the nervousness of the private sector due to the requirement of disclosure regarding source of investment. If the fear of probe persists, the privatization process may also suffer due to the cold response by Pakistanis, and the government may be forced to sell the family silver to foreign entities at throwaway prices. However, the success of the new initiative would depend on the ability of the authorities to introduce the necessary safeguards in a meticulous manner in order to evoke an enthusiastic response. This would require ensuring that the Wealth Tax Act is rescinded and the provisions of the new package remain in force and be faithfully implemented even after transfer of power by the present government.