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Sunday, October 4, 2009

Pakistan’s FOREX Scandal

In an attempt to staunch an illegal hemorrhage of US dollars out of the country mainly through the officially banned Hawala system, Pakistani authorities have come down heavily on the country’s ace moneychangers, Kalia and Khanani International (KKI). Their head office in Karachi was raided and sealed by the FIA (Federal Investigating Agency) on November 7, their computers and records were seized, and both senior executives, Munaf Kalia and Javed Khanani, along with three other currency dealers, were taken into custody for investigation. Subsequently, they were placed under judicial custody by a Karachi magistrate. The State Bank of Pakistan has suspended KKI’s license for a month. The company had 24 branches and 9 franchises.Some $10 billion is stated to have been remitted abroad in the past one year through Hawala. Interior Ministry claimed that in October alone $500 million were sent abroad. Such illegal transfers have helped drive rapid depletion in the country’s foreign exchange reserves that have shrunk from $16.5 billion last year to $6.75 billion last month. That has also caused a loss of confidence in the stock market that was constrained to keep its doors closed for the past three months in order to avoid a total crash. Rupee has, over the past few months, lost value against the dollar by 1/3rd.In a relevant development, nearly 1,000 lost and fake identity cards have also been seized from functionaries of Pakistan Post and National Database Registration Authority (NADRA).Pakistan’s foreign exchange reserves having almost touched the bottom, the country had to approach friendly governments as well as the IMF for help. China has offered $500 million, Saudi Arabia has offered to supply oil on credit for two years, and the IMF has agreed to lend $7.6 billion as emergency loan, and the 14-member Friends of Pakistan (FOP) group has also pledged support to the country. It would be quite unfair to attribute the dire financial position of the country to the illegal activities of forex dealers. They did play a role in the depletion of the country’s reserves, but the major responsibility rests with the nonchalant approach of present leaders. They have expanded the cabinet to 60 members and decided to reinstate 6,000 officials who had been recruited en mass by the PPP government in 1993-96 and shown the door after the change of regime in 1996. Both actions were politically motivated and the decision about the reinstatement with arrears of pay is much more so, and would cost the exchequer billions of rupees. The conditions attached to the IMF loan might be constraining and unpleasant but they will effect some discipline among the policy makers.Like a dented gramophone record, the present managers of the economy of the country blame the former Prime Minister, Shaukat Aziz, for all and any set back they experience. The common man is intelligent enough to realize who is to be blamed if a mother is constrained to leave her children with Eidhi Trust for her inability to feed and clothe them.Similarly, it would be futile to blame Shaukat Aziz for any act of omission or commission that has led to the forex dealers’ irresponsible conduct. During his period, the begging bowl was discarded and the national debt kept declining with the direct foreign investment (DFI) graph moving northward.Actually the government is barking up the wrong tree. The money- changers were but the vehicle of the big guns who have transmitted their money to foreign, more secure and safe lands. How many families in Pakistan have wealth in such quantities that they could remit tens of billions of dollars within a few months? At the most, a couple of thousand families. Small amounts, no doubt, might have been sent by a vast number for the tuition and sustenance of their wards” schooling abroad, or for the payment of some other encumbrance, legal or illegal. Why is it then that the Interior Ministry has not disclosed this far a single name of the big fish? The Financial Adviser, Shaukat Tareen, has declared quite emphatically that the authorities will not let go any culprit no matter how well connected he might be. That is exactly where the rub is! For, the general perception is that the concerned persons have so much political and administrative clout that no government could dare lay its hands on them. They are not just businessmen like Kalia and Khanani who could be arrested and humiliated.Numerous media reports have hinted at the involvement of senior civil and military officers, political figures and influential families in the transfer of funds to foreign lands. The Interior Adviser, Mr. Rehman Malik, has declared, on the other hand, that no evidence was yet available concerning the role of the big fish in the scam. But, Mr. Malik has come out with so many statements on the subject that are not necessarily in harmony with each other.Perceptions often rank higher among the common people of Pakistan than realities. The reputation of Mr. Zardari continues to remain tainted as Mr. 10%, and Mr. Malik, his closest confidant, compatriot and hatchet man in the current dispensation of power, carries the perception of having been a cloak and dagger man of the FIA surreptitiously tapping the telephones of VIPs. Mr. Zardari, an exceptionally shrewd person, is trying hard to superimpose the image of a sober and reliable Head of State over the perception of Mr. 10 percent. Yet the perception lingers on. An analysis of the forex scam on the blog, Pakspectator, contended on Nov.11: “Some people are claiming that as the money exchangers refused to pay extortion money to the front men of Zardai, that is why they are being made an example for others to follow the lead silently.”Another comment on a different blog,, said: “Money market analysts suspect KKI’s political-business rivals are playing a game for the benefit of Mr. 10% and his mafia gang including Interior Adviser Rehman Malik….”The flight of capital is essentially the outcome of the loss of confidence of the moneyed classes in the stability of the present regime or its ability to steer forward the ship of state on an even keel. Since the forex case is now sub judice, it would be unwise to say anything on the substance of the charge. Defense side of the case will be known only after the hearings start. Meanwhile we may consider a couple of points having a bearing on the crux of the matter.Hawala system has its origin in classical Islamic law going back to the 8th century. Aval in French law and Avallo in Italian law have been derived from Hawala. This was a very effective system for transferring money from cities to villages having no bank. It has been in existence for over a millennium. After 9/11 it was banned in the US as certain Muslim charities were suspected of transferring money to Al Queda through this system. Pakistan too placed a restriction on it. But, the country licensed private money exchangers who operated a more efficient system than banks for the flow of expatriates’ money, totaling $7 billion annually, to their families many of whom lived in villages.With the advent of the World Trade Organization in 1993 (Pakistan is a member) customs and foreign exchange barriers were brought down making it possible for goods and money to move to any part of the world without any hindrance. Would the present regime in Pakistan defy the commitments made under WTO and go back to the erstwhile pattern of official controls? The less the controls, the better the market economy functions.

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