PAKISTAN’S foreign exchange reserves have been in the spotlight recently for a variety of reasons. There was an imminent threat of default in case the treasury fell short of dollars to pay import bills and make debt payments. The IMF’s rescue filled the coffer with the required dollars. Similarly, China, Saudi Arabia and the UAE helped the country wade through the financial storm. These patchworks are no substitute for a sustained and reliable financial system that responds from within through exponential growth in the country’s exports. Once Pakistan is able to increase its exports, the problem associated with the trade deficit shall be adequately addressed. However, for any growth in exports or local manufacturing, Pakistan needs to ensure effective measures to remove inefficiencies from its energy sector, stabilize its exchange market and establish a taxation system that encourages foreign investment.
The abnormal dollar-rupee parity that went wild in recent months was due to traders arranging dollars themselves (to avoid import restrictions) and finding alternate settlement arrangements. Consequently, it led to a rise in the demand for dollars. Since the government was already facing a rapid depletion of dollars, the grey market grabbed the opportunity to fill the gap through the hundi-hawala system. The compound result of the policy measure resulted in the smuggling of oil, dollars and gold.
According to an estimate, 30% of the country’s oil was smuggled from Iran, whereas the country lost $5bn a year as a consequence of gold smuggling. In the meantime, remittances fell to unprecedented low volumes in FY23 compared with FY22. Pakistan can potentially receive remittances over $50bn annually. This had reduced to $27bn during the last financial year—down by $ 4.3 billion from its peak of $31.3bn in 2021-22.
Things, however, are brought under control with the crackdown on smugglers and money hoarders. The stringent measures taken by the SBP, such as putting a cap on the capital requirement of exchange dealers and encouraging large banks to open their own exchange companies, have played an additional role in stabilizing market sentiments. These actions would bring the movements and operations of exchange markets under the surveillance of SBP, enabling it to curb money laundering through the illicit hundi-hawala system.
Additionally, the government will have to take measures to stop the traders from under-invoicing, because of which the government loses a significant chunk of taxation revenue. Another issue besetting the exchange market is the flight of dollars to Afghanistan. The official figure put the value of dollars smuggled to Afghanistan at $60 to $70 million a month. The unofficial figures are around $150 million each month.
When Pakistan was put on the grey list of FATF, it changed its regulatory framework and mode of banking in multiple ways to accommodate the demands of FATF regarding money laundering and terror financing. The crackdown on money launderers is in line with Pakistan’s international commitments and there is no way that Pakistan would ever allow the normalizing of money laundering or terror financing.
After the clampdown on dollar hoarders and smugglers of gold and Iranian oil, the forex market in Pakistan has started coming to its feet. According to the market sources, the demand for the dollar has exceeded its supply. This trend, however, will only keep its pace if policy, regulatory, and administrative measures are taken in combination to fill the gaps from where black money is pushed into the country. One of the overriding measures is to demand sources of funds for clearing import shipments at ports. Not only will it improve the shortfall of revenues, but it will also ensure that legal shipments paid enter Pakistan.
The responsibility to curb the flow of black money is also on the banking sector. It should introduce strict regulatory mechanisms to increase the surveillance of money flow and act as the first line of defence in implementing anti-money laundering programs and policies.,.
Where several strategic initiatives can help the country overcome the pressing economic crisis, encouraging worldwide Pakistani Diaspora to turn towards regulated channels of remittances to abstain from the black-market flow of foreign reserves can prove instrumental in this regard. An existing stringent measure by the State Bank of Pakistan, the Ministry of Finance and the Ministry of Overseas Pakistanis, known as the Pakistan Remittance Initiative (PRI), has been striving to boost regulated remittance inflows to the country. Besides, the recent crackdown against the black market trade of dollars shows an astute move to control the repercussions of illegal activities, thus creating rays of hope for the declining economy to rejuvenate.
This writer fervently believes that a similar trajectory of leveraging effective measures and taking actions against social evils and culprits like the black market trade of dollars, gold and oil, coupled with the unregulated flow of foreign reserves, can bring substantial change in Pakistan’s current GDP and can fast track the overall economic growth.
—The writer is the CEO of the UK’s fast-growing companies ACE Money Transfer and ACE Union Limited.
