By Farrukh Saleem
ISLAMABAD: As of February 2008, according to data compiled by the State Bank of Pakistan (SBP), net foreign exchange reserves held by the SBP were $ 11.9 billion and that of the
commercial banks were $ 2.1 billion.
Over the following nine months, net foreign exchange reserves held by the SBP have gone down to $ 4 billion while that of the commercial banks have actually gone up to $ 3.28 billion. In essence, the SBP has lost $ 7.88 billion while the commercial banks have gained $ 1.18 billion. In other words, the SBP has surely lost but there is no evidence that Pakistani citizens have taken their dollars out of their dollar accounts and sent them abroad.
Where then is the foreign exchange reserve scam? Has the SBP been sending dollars through money changers? Money has wings. It flies to where it feels safe. And that means Hawala or Hundi. Hawala is an alternative means of transferring value from Point A to Point B.
It is based on two things: honour and performance. The truly unique feature of the Hawala system is that no promissory instruments are exchanged between the Hawala brokers; the transaction takes place entirely on the honour system.
As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. No records are produced of individual transactions; only a running tally of the amount owed by one broker to another is kept. In that sense, Hawala is a bank that never was.
Intriguingly, elements of commercial law under common law also have their origin in Hawala. Even the French and the Italians studied Hawala and developed the ‘Aval’ in French civil
law and the ‘Avallo’ in Italian civil law.
Do our money changers undertake Hawala transactions? From a legal standpoint, the more important question is if Hawala can be proven in a court of law. From a practical standpoint, the more important question is if the government of Pakistan can put an end to Hawala.
For the record, our government has so far failed to attract dollars. Thus comes the unsubstantiated accusation that money changers are to be blamed. The main reason that the SBP has lost nearly eight billion dollars in as many months is a billion-dollar-monthly trade deficit, not the money changers.
The main reason that the rupee has lost a quarter of its value is the $ 20 billion annual trade deficit, not the money changers. What does the government really get out of handcuffing leading businessmen? Nothing but damage its own credibility. What does the government really get out of arresting the wheels of an economic system? Nothing but hurt the economy.