Currency shakeup

Updated November 28, 2016

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Pakistan intends to carry on with its routine plan to substitute old design banknotes and replace low value ones with coins. The Finance Minister dismissed the possibility of going the Indian way of ‘shock and awe’ on currency demonetisation to shakeup the black economy.

Indian Prime Minister Narendra Modi on Nov 8 scraped 500-rupee and 1,000-rupee notes with the stroke of a pen. The blowback in India, particularly its impact on the unbanked rural population, generated a debate the world over on the economics and politics of the surprise move that, the Indian government said, was aimed at bringing the unaccounted, multi-billion dollar wealth back into the economy.

The fact that two notes accounted for more than four fifths (86pc) of the currency in circulation is said to have caused the havoc and exposed how unprepared the Indian government was to deal with the consequences. Some detractors believe that the collateral damage may outstrip the benefits. The FMCG multinational’s falling sales in India may be taken as a symptom of the actual disruption.

Equipped with the demonetisation experience next door, Pakistan can start the same movement by invalidating the Rs5,000 note first. The shadow economy in the country is believed to be equally big if not bigger in proportion to the overall economy, business circles believe.

Top Pakistani businessmen, however, do not see this happening under the PML-N rule.

“Once bitten, twice shy. To my mind, PM Nawaz Sharif and his team have yet to completely recover from the pitfalls of their earlier drastic move; something that comes up whenever a reason for businesses lack of confidence on the political government is discussed. In 1998, after the nuclear tests, the government froze foreign currency accounts. After that fallout it will always be reluctant to shock the financial sector”, a top businessman said.

Many agree that the demonetisation of Rs5,000 note would address a major economic policy anomaly perpetrated in 2005 by the economic wizards of General Musharraf’s government — responsible for launching the high value note. “They talked market economy but walked in the other direction”, a businessman from Lahore remarked on the Musharraf era, complaining of several measures that hurt free and fair market.

“The cement and fertiliser cartels and the bankers and brokers nexus benefited a very narrow band of populace and created bubbles that busted soon thereafter” he elaborated.

Business circles believe that while the government may certainly dump the highest value note, this may not happen in the immediate future.

Dilating on reasons they mentioned the political cost to the sitting government if it appears to be imitating a hostile India; and thought that the financing of future political campaigns might also be a reason to leave the issue untouched.

“With the general elections a little over a year ahead, political parties are already gearing up for expensive election campaigns. It is an open secret that the actual spending in electioneering is many times more than the permissible legal limit. The access to high value notes will facilitate untraceable money movement”, another executive remarked.

The circulation of Rs5,000 notes in terms of volume of total currency in circulation is hardly 5pc, but because of a high denomination in terms of value it is estimated to be around 35pc of the total value of the currency in circulation in Pakistan, according to informed individuals.

Muneer Kamal, chairman of the Pakistan Stock Exchange, did not mince word to support the idea of demonetisation starting with Rs5,000 rupee note and the Rs40,000 prize bonds.

“To me it would be a win-win situation for all: businesses, government and the economy. It will curb the shadow economy and improve the business environment by removing distortions that tilt the field in favour of unscrupulous elements in the market, will limit the scope of cash transactions and improve tax collection prospects for the government hence generating a growth momentum by channelising money towards the most rewarding investment avenues”, he said.

Salim Raza, former State Bank Governor, was not averse to the idea but talked of several measures that would be less disruptive and more rewarding, such as increasing the reach of the banking system and creating an environment where banks are better mobilised to respond to private sector credit needs for higher growth.

The Pakistan People’s Party recently moved a motion in the Senate for the demonetisation of high value currency notes. This generated some ripples in the market that only calmed down after the direct intervention of the finance minister who categorically disapproved it.

“People tend to make a bogey out of everything. What disruption are they talking about? Yes, asset owning classes, who deal in cash to avoid taxes in Pakistan, and mafias will feel the pinch, but let them. After ten years the tender is still often visibly exchanged. It is used to finance high value cash transactions in property and luxury items. Do you think people on the street would care if Rs5,000 note is withdrawn? I seriously doubt that”, concluded an analyst in favour of immediate demonetisation of the note.

The Overseas Investors Chamber of Commerce and Industry in a query on the issue responded in writing thus:

“Going by media reports the abrupt move of the Indian government has back fired, not achieving objectives. It has entailed a high political and economic cost.

“As far as Pakistan is concerned, there is a sizeable black economy and the authorities are fully aware of how to tackle it as all the responsible business chambers and professionals have given workable solutions for it. The Tax Reform commission has done a good job in this area as well.

“However the question remains – does the political leadership, not limited to the party in power, have the political will take such a step keeping the critical factor of timing in view.

“The offer of amnesty to legalise part of an undocumented economy — like the one being talked about these days on property transactions and value — is counterproductive and records show that such a move has not worked in Pakistan in the past. We are totally against amnesty schemes in such matters”.

Published in Dawn, Business & Finance weekly, November 28th, 2016