A forex reserve scandal? By Dr Farrukh Saleem

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The State Bank of Pakistan (SBP) classifies foreign exchange reserves into two categories: net reserves with the SBP and net reserves with banks. For the record, over the past 10 months or so, net reserves with the SBP have gone down by some $10 billion while net reserves with banks have gone up by around a billion dollars.

Last week, Pakistan’s leading moneychangers were arrested on charges of illegally remitting abroad $10 billion from the country and depleting Pakistan’s foreign exchange reserves. The assumption here is that there was $10 billion worth of net reserves with banks that the moneychangers have routed out of Pakistan. The SBP records clearly show that over the past 10 months private Pakistani citizens have not taken dollars out of their accounts from Pakistani banks for the purpose of remitting $10 billion dollars out of Pakistan (http://www.sbp.org.pk/ecodata/forex.pdf). As a matter of fact, net reserves with banks never went as high as $10 billion so there is no question of moneychangers depleting reserves with banks and remitting $10 billion out of Pakistan. Yes, the SBP reserves have gone down by $10 billion but the Federal Investigation Agency (FIA) is surely not accusing the SBP of sending dollars abroad through the arrested moneychangers. In that sense, there is no foreign exchange reserve scam. Next, the hawala story. To be certain, hawala is a term that was first mentioned when the Islamic fiqh was being written back in the 8th century. So, hawala has been going on at least for the past 1,300 years. In a more modern sense, hawala is simply the transfer of value from one city to another through the use of an informal, non-banking channel. Hawala essentially has two legs — one in Pakistan and the other outside of Pakistan (presumably, the second leg or the suppliers of dollars are Pakistani expatriate workers). And, the whole hawala affair depends on two things: trust and performance. One thing that hawala does not have is a paper trail.

Three questions: one, why do people use hawala? Two, are Pakistani moneychangers involved in hawala? Three, would the Federal Investigation Agency (Crime Circle Wing) be able to prove wrongdoing on part of moneychangers in a court of law?

Logically, people would use hawala only in those instances when hawala operators provide a superior service as compared to regular banking channels. Either the pick-up or delivery is more efficient or the rate of exchange is better. Naturally, if Pakistani banks want to snatch business away from hawala operators they would have to compete in delivery as well as the rate of exchange. As long as hawala is more efficient the hawala network is providing an essential service that the market wants and thus no government on the face of the planet would be able to shut hawala down.

There is little doubt that our moneychangers do undertake hawala transactions. And, there is little doubt that the Federal Investigation Agency will fail to prove charges against moneychangers in a court of law.

Next, have moneychangers caused Pakistan any extraordinary damage over the past few months? To come up with an answer to that, I compared a whole host of figures on home remittances as compiled by the SBP (http://www.sbp.org.pk/ecodata/homeremmit/remittance.pdf). The SBP figures clearly show that there has been an upward trend in home remittances through banking channels and that upward trend has sustained itself over the recent past. In other words, Pakistani expatriate workers who have in the past used banking channels to remit their earnings have continued to do so over the past few months as well. There is no evidence whatsoever that an extraordinarily large amount of home remittances has been diverted away from banking channels.

Is there any evidence that our rupee has lost value because of moneychangers? I have no doubt in my mind that transactions undertaken by moneychangers have an affect on rupee-dollar parity (albeit a minor one). I am also sure that the principal determinant of rupee-dollar parity is our billion-dollar-a-month current account deficit and not moneychangers.

Here is what I do not understand: what would our government get out of this whole drama. Don’t we already have enough uncertainty? Isn’t the Karachi Stock Exchange already shut down? Isn’t the economy already going through a severe heart attack? Has $10 billion really been sent abroad? Doesn’t anyone in the government know that the total stock of rupees in circulation is Rs980 billion or the equivalent of $11 billion? Isn’t there a soul in the government who first analyses pros and cons of governmental actions before actually ordering action? Has the government also been indoctrinated by the indoctrinators of suicide bombers?

The writer is an Islamabad-based freelance columnist. Email: farrukh15@hotmail.com



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