ISLAMABAD, Nov 11: The ‘legal’ transfer outside Pakistan of over four billion dollars in the last few months, or the so-called flight of capital from the country, through normal banking channels or authorised dealers, was made possible because of an amendment made in the foreign exchange law during the previous regime and which, besides the central bank officials, was in the knowledge of only a few powerful individuals.
Successive governments, particularly the one led by Shaukat Aziz, remained so secretive about the change made in the law in 2003 that during all this period neither the finance ministry nor the State Bank of Pakistan posted it on its website.
Even today only a few individuals are aware that it was published in the official gazette, which is a legal requirement, but its copy remains untraceable in the finance ministry, a senior ministry official told Dawn. “We are searching our records to locate the notification SRO984 of 2003 but without much success,” he added.
Even though some of the senior bankers have heard of the existence of a statutory regulatory order or SRO984 (I) 2003, through which the restrictions imposed on transfer or holding of unlimited amount of foreign exchange were withdrawn, they have not seen it with their own eyes.
Dawn has learnt on good authority that former prime minister Shaukat Aziz, in the capacity of finance minister, introduced the amendment through the SRO984 by rescinding SRO1016 issued on October 17, 1979, to do away with the restrictions of surrendering foreign exchange to an authorised dealer for conversion into local currency within a period of three months of receiving or bringing in the same.
A number of senior officials and experts interviewed by Dawn during the course of the investigation said the move was apparently aimed at allowing resident Pakistanis to keep their foreign exchange earnings for an unlimited period without getting it converted into Pakistani rupees. And the beneficiaries included many top politicians and other influential people of that time.
However, as the amendment in the law through this SRO also meant withdrawal of restriction on transfer of foreign exchange abroad, said experts, during the current crisis it was used by the rich and influential to send billions of dollars through “legal” channels.
The other complication that emerged from the repeal of this SRO1016 was that the earlier law that disallowed the maintenance of an account in a foreign country became operative.
Even then the SBP tried to create more confusion, says a senior finance ministry official. According to him, the SBP clarification issued on October 19 last year on this subject was vague, if not misleading. It said the restriction on Pakistani nationals not to hold more than $1,000 in deposit in foreign currency account (FCA) abroad was withdrawn through this SRO. But, according to this official, the withdrawal of SRO1016 means that forex would be regulated in accordance with the provision — Para 9 of manual 2002.
Under the SRO1016, for resident Pakistanis only an exception was given for opening FCA abroad with deposit of up to $1000. But because of a conscious or unconscious move not to post the amendment under which 1979 SRO was withdrawn, the paragraph 9 of the Forex Manual 2002 Chapter-VI, 8th edition posted on the website of the SBP still carries the reference of SRO1016, thus suggesting that a resident Pakistani can maintain an FCA for up to $1000.
After the repeal of SRO1016, the paragraph 9 of the Forex Manual 2002 Chapter-VI, 8th edition, clearly said that Pakistan nationals resident in Pakistan were not permitted to open or maintain any FCAs with banks outside Pakistan.
A set of written questions were sent by Dawn to the SBP to seek an official version. However, spokesman for SBP Syed Wasimudin told Dawn on telephone that the bank was not willing to reply to these queries.
The prohibition regarding the opening of FCA was originally contained in the 7th Edition of the Foreign Exchange Manual (FEM) issued in 1992 even though that edition came out after the promulgation of the Protection of Economic Reforms Act (PERA) 1992.
The same prohibition appeared in the revised 8th Edition of FEM issued in 2002. The SBP holds that the prohibition contained in the 1979 SRO was incorporated in para 9 of the 8th Edition.
Expert lawyer Mansoor Khan questions the logic being put forward by the SBP. He says it’s hard to understand as PERA came out in 1992 while the 8th Edition came out in 2002. If there was a prohibition under PERA it should have been reflected in that edition, he added.
“The fact of the matter is that the SBP did not repeal its restrictions on opening of foreign bank accounts in the 8th Edition primarily on account of the amendment made in PERA in 1999, which curtailed the scope of the ‘complete liberty’ regarding bringing in and taking out foreign currency from Pakistan.”
A detailed review of the SBP manuals and legislation showed that as of today the laws posted on the website of the bank carried the same restriction.
In fact as of November 8, 2008, the FEMs available on SBP’s website continue to maintain those restrictions. A review of all the FE Circulars and FE Letters issued between 2002 and 2008 confirms that no FE Circular or FE Letter has so far been issued to effect any such changes.
According to the source, one anomaly was that under Foreign Exchange Regulations Act (FERA) 1947, a resident Pakistani could not keep more than $1,000 in overseas FCA while under the Protection of Economic Reforms Act (PERA) 1992 there was no such restriction. But experts say this position changed radically in 1999 when the Protection of Economic Reforms (Amendment) Ordinance, among other things, added sub-section 4(2) severely curtailing the “complete freedom”.
According to them, the so-called “complete freedom” was either removed or severely curtailed as early as 1999, he added.
Another anomaly was that under FERA 1947, an individual could not take out of the country an amount more than $10,000 in cash, whereas PERA 1992 prescribes no such limit. “It is not clear which law takes precedence, the old one or the amended one,” says another expert.