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Alarming picture: Capital flight

October 03, 2013


THE governor of the State Bank of Pakistan, Yasin Anwar, is perhaps the first senior official to concede that capital is being moved out of the country in very large sums, and also to quantify it. In his testimony before senators on Tuesday, Mr Anwar said $25m were being ‘smuggled’ out of the country in briefcases every day from four major airports — Karachi, Lahore, Islamabad and Quetta. He did not say how the bank had worked out the size of the illegal capital outflows and since when this practice had been going on — and these gaps in information have left some economists puzzled. However, even if half this staggering amount is going out of the country each day, it would confirm how porous our custom checkpoints have become, not least because of corruption and weak controls. It would also show how the weak enforcement of anti-money laundering laws is playing havoc with the economy.

Some analysts say the capital outflow could be the result of the recent decision to give tax collectors powers to access the bank accounts of the rich in order to apprehend tax cheaters. If so, the outflow could also be a major factor in the speculative pressure on the rupee and the currency’s rapid depreciation in recent days. But the capital flight is not altogether a new phenomenon. The wealthy have been moving their money out of Pakistan in order to avoid actual or expected taxes as well as unwanted government interventions. Earlier, capital flight took place through the informal channels of hundi and hawala. Now the people carry cash to circumvent the restrictions imposed by foreign states on these channels to curb funding for terrorism.

In many cases internationally, flight of capital is related to money made from activities such as drug trafficking, gunrunning, tax evasion, theft, etc. In other cases, it reflects the loss of confidence in the economy and its ability to bounce back. In either case, the implications can be serious for economic stability, investment, growth and equality. While the rich can and do move their financial assets out of the country, the poor are left to shoulder the burden of the depleting value of the currency. Therefore, it is imperative to place strict checks to curb the illegal transfer of money through ports or informal channels. But before that the government will also have to remove lacunae in the anti-money laundering laws, abolish ‘legal’ money-whitening schemes, and increase controls over money changers who help people move their ill-gotten money out of the country.