24 May 2004	Monday	04 Rabi-us-Saani 1425

The ministry of finance and the State Bank of Pakistan have been disturbed, if not upset, by the fall in home remittances of overseas Pakistanis , estimated to number four million.

They are slipping at a time when the oil import prices are soaring steadily and the overall import bill is also rising due to larger import of machinery and industrial raw materials, which enlarges the trade deficit that had been narrowing greatly earlier. The steady rise in home remittances too had gone to swell the foreign exchange reserve of Pakistan, which now exceeds $12.5 billion. But the remittances are still very high compared to the demoralising pre- 9/11 position when they were $876 million in 1998-99 and $913 million in 1999-2000.

They crossed one billion dollar mark in 1991 - the year of 9/11 and the next year they were $2.34 billion and then peaked to $4.19 billion last year. And that certainly was a record for Pakistan. But the home remittances of many other countries too had gone very high last year as the world economy began stabilising.

Even for the ten months of the current financial year ending April, the remittances totalled $3.2 billion, and the year is projected to end with $3.8 billion - about $400 million less than the peak earnings of $4.199 billion last year.

And that became possible as the April remittances jumped by 9.7 per cent over the March earnings and brought in $335 million. But a 30 per cent fall in remittances from the UAE - the largest single source of revenue from the Gulf region - has disturbed the government as the gap between the $718 million sent last year and $500 million sent this year so far might have been filled by the invisible Hundi system which following its reorganization has became active again.

The State Bank and the banks in Pakistan are trying to choke off the hundi-havala system and make the money flow through normal banking channels into the open monetary system.

That is not by any means easy as Karachi and Dubai have close underground connections for such underground transactions which are very strong and very old. One of the measures which the State Bank proposes is to bar the import of dollar currency from Dubai.

Meanwhile, the government is taking a number of measures to check money laundering. There is close cooperation between the government and the international agencies in this regard.

The government on its part has signed a number of extradition treaties with other countries so that it can get back to the country those who had looted the wealth of this country and fled. And it is cooperating with the US government which has done a great deal of work in this area. And the Securities and Exchange Commission of Pakistan (SECP) has now drafted a law to check money laundering. And it is waiting clearance by the law ministry and approval by the government.

Of course, what matters is not the law but how diligently that is implemented by the government disregarding political preferences and ruling arty cronies. An honest government has plenty of work in this regard and a lot of money to save, if it does not play the game of favourites or is not too slow to act.

There are a number of reasons why overseas Pakistanis avoided havala to send money home and opted for the use of regular banks after 9/11.

1. Vigilance on the part of the Western governments led by the US and probes into the bank accounts of Pakistanis to verify shelter they were directly or indirectly funding terrorism and a close watch on the hundi operators.

2. They found interest rates in Pakistan high compared to what they were in the west when the US federal reserve came up with its rate of 1 per cent and sustained it. Compared to that interest rates in Pakistan then were 8 to 10 per cent.

3. The two to three rupee gap between the price of the dollar in the open market and the inter bank rate has also vanished, and this particular gain which they had when they sent their money through the havala has also vanished.

4. Land prices were then very low here 30 to 50 per cent low compared to the earlier normal prices. So the temptation to send the money to buy the land in cities as well as agricultural land was very strong.

5. The US dollar was weak and falling against the strong currencies like euro. So the people bought up the euros. The rupee seemed to be strong and steady.

6. The stock markets in the country buoyant and share prices were booming and the KSE index was touching the peak of 5600. Many chose to profit by that.

But now this picture is greatly changed. The dollar is getting stronger and the rupee is slipping against that. Interest rates in the West are going up, though not in the US. The Bank of England has set rates far higher than the European bank.

Land prices in Karachi and other cities have become too high, and house-building is too costly because of the high cost of steel and cement. And share prices have stabilised at a very high level and it is risky to venture into the market to buy high priced shares.

More important than all these some of the money sent from Pakistan is the fruit of corruption on a large scale, or big-time crime or heavy drug trade. Some of the money which comes back home is the same money. And it is always not safe to get this money back home through the banks and make the transaction transparent and actionable. So banks, including those in Dubai, have been asked to keep an eye on such movement of illicit money.

The hundi or havala system is much safer for such transactions. They have to be as invisible as possible. Dr Tariq Hasan, chairman of the SECP, says money laundering promotes an increase in crime and corruption.

That is true, but in reality money laundering is the fruit of corruption and crime on a large scale as well as the massive drug trade with Afghanistan growing all the poppy needed as the base material.

According to a UN survey the global drug trade, inclusive of the retail value, costs $400 billion. Hence a crack down on crimes and large scale corruption in all their forms is imperative and urgent.

It used to be said until now that every bank should know its customers. But now Dr Tariq Hasan says, every financial outfit should know its employees. That is essential as a middle level employee like Nick Burns could bring down the famous ING Bank of Britain which had Queen Elizabeth II as its customer.

An international anti-money laundering task force has been working for some years with its base in the US; which is the driving force behind that task force. And its recommendations have been accepted by a good many western countries.

In view of the fear that money laundered in this manner could be funding terrorism the countries are taking its recommendations seriously. In view of the rise in terrorism in Pakistan and the large funding terrorists seem to enjoy Pakistan has stepped up its campaign against money-laundering. But it has tackled only a part of the large monster.

But when Pakistan talks to the western countries about repatriating the looted funds or the men who looted who are staying in the west the western countries are dragging their feet. They are interested only in selective action in this regard and not on a wholesale operation clean-up.

It is said the amount of money looted and sent abroad from Asia is far larger, in fact several times, than the aid received by them. Some of those countries are reluctant to sign extradition treaties with Pakistan as they help extradite such criminals from western countries to Pakistan and recover the looted wealth.

But that western countries may not be able to delay such agreements for too long. But one salutary outcome of 9/11 is the remittances from the US to Pakistan which were $82 million in 1998-99 and $80 million in 1999-2000, rose to $1.238 billion last year and the tempo is being kept up.

Otherwise the educated Pakistanis working in the US were sending too little of money home. If they were sending more that was through the hundi system. But now with the US vigilant in this area the US is the single largest source of home remittances sent through the banking channels with UAE as the second source and Saudi Arabia as the third.

If the high volume of home remittances is to be sustained, Pakistani banks abroad have to work hard, and the attaches in our embassies have to strive relentlessly and we have to maintain favourable conditions at home to ensure those who use the hundis do not gain at all and those who use the banks do not lose.

The gap between the inter-bank rate and the open market rate has to disappear and the rupee has to be steady in its external worth, and strong. And yet as long as corruption and big time crime thrive in Pakistan along with large scale drug trade hundi or havala will be used to transfer money both ways as such transactions cannot afford exposure to legal light or become transparent.