‘Hundi’ or ‘Hawala’ that expatriate-trusted mode of remitting money home is not going for good. Even the Americans know it, although they still hope to eradicate it from the face of the Middle East and other parts of the world, including Pakistan.
Why did remittances to Pakistan from the US and UAE in particular, and globally in general, decline in the first quarter of 2004?
Are the ‘hawala’ or ‘hundi’ operators going to outsmart the smart American “monitors” whose job is to stop unofficial cash flows across the globe, particularly from the expatriates from the Gulf to Pakistan, India, Bangladesh, Sri Lanka, the Phillipines and any other imaginable destination?
No less than United States Treasury Secretary John Snow acknowledges it. “Some charities are engaged in funding terrorists through ‘hawala’ cash flows,” Snow said recently in Islamabad. “Security is essential for growth, in Pakistan as well as in any other country.
But, security is undermined by international terrorists, that in turn undermines growth,” Snow said after talks with President General Pervez Musharraf, Prime Minister Zafarullah Khan Jamali and Finance Minister Shaukat Aziz. He said, “in order to stamp out international terror, all funding going to terrorist groups should be choked off.
“This is why the US and its allies, including Pakistan, fighting global terrorism have joined hands in cutting off all funding to terrorist groups. The government of Pakistan has undertaken enormous strides to curb money laundering. Pakistan wants to be, and is in the forefront, of the war on terror.
Evidence of that is the strong action that has been taken against money laundering and registration and regulation of ‘hawala’ netwroks.” Snow also said, “Already the ‘hawala’ operators and terrorist groups are switching over to using carriers and couriers to pass on cash across the international borders. It must be stopped.”
“Prevention of money laundering in Pakistan, which still has no law against this practice, was a major discussion point with Mr Snow,” Aziz said.
Aziz said, Mr. Snow, during his just-concluded talks here had urged the Pakistani Parliament to enact the Anti-Money Laundering Act (AMLA) to enforce stiff action against illegal financial transactions and terror-funding practices.
“The fight against money laundering needs a fully coordinated effort, worldwide, as there are three elements to check them. These cover the country where the transaction originates, the recipient country and the final beneficiary,” Aziz says.
The SBP Governor Dr. Ishrat Hussain, who participated in the talks with Snow, says “we have prepared the draft of AMLA. It strictly conforms to international standards. It now awaits passage by the Parliament. AMLA fully covers recommendations of the Financial Action Task Force (FATF).”
A United Nations team, earlier, during its discussions with SBP and Pakistan Banks Association, provided its input for the law. AMLA makes it compulsory to profile all bank account holders, existing and new ones, to monitor fishy cash flows on the basis of 100 regulatory provisions.
Besides the forex flows and accounts, under legal provisions and Know Your Customer Rules (KYCR) all rupee account holders will also be profiled.
But, how to pull the rug from under the feet of the mighty smuggling mafia that pushes all sorts of goods and currencies across the border.
Contrary to the government’s claims to check smuggling, it has grown from an estimated $ 3.0 billion (b) annually a few years ago, to $6 to 7billion as of now. Independent economists estimate that compared to Pakistan’s annual official imports of $ 12.0 billion, an adaptational 60 per cent goods come through smuggling.
The smuggling mafias pay everyone down the line from boat and ‘how’ operators to jumbo jet owners, customs, coast guards, rangers and police to get their stuff in and out.
The movement ranges from greenbacks to household electronics, to capital goods and industrial raw materials. When India faces a cotton shortage, caravans of camels start moving through the Pakistani desert to Western India where part of its textile industry is located.
When there was a food shortage in India, Pakistani wheat was smuggled out in exchange for India’s whisky and bear. Can Snow or any big gun stop such smuggling and the dollar flows, financing it?
“For Bush to take it on, will be more difficult than to conquer Iraq and Afghanistan put together,” says a senior official dealing with the problem.
Besides the needs of expatriate to send money to far of places in the region, what else has encouraged ‘hawala’? I will say it includes the official agencies of the recipient countries. That includes the SBP, itself.
It purchased millions of dollars from offshore money changers, and paid upto Rs3 a dollar over and above the official rate of exchange.
In fiscal 2002 alone SBP The SBP says it has stopped buying dollars from offshore money changers after 9/11. But, the State Bank of Pakistan continues to buy and sell dollars in the interbank market, which now fends more than 90 percent of countries needs, and is virtually considered to be the official rate of exchange.
Expatriates sell their dollars into the interbank market which then are freely bought and sold. However, the interbank rate is around Rs0.70 to 1.00 less than the kerb. At the end of 2002, greater supply and smaller demand for greenbacks, for the first time in years, had pushed the kerb rate below the interbank rate. It did not last long.
The premium offered by the kerb continues to attract forex, rather than the interbank market. Another reason is that no questions are asked when you sell to or buy from the kerb. No documentation of buyers or sellers is done. Taxmen ask no questions. Its faster than any official banking channel.
Its outreach is the widest. It operates merely on the basis of supply and demand. Supplies and exchange rates are taken from the bustling Dubai market, although Singapore, Bombay and regional markets, too, influence it. All non-dollar currencies are exported to Dubai, changed into dollars, and brought back to Pakistan. It operates under SBP rules.
Only months ago, the SBP launched a programme to, eventually, eliminate all the 400 officially licensed and other money changers over a period of two years.
The SBP, by now, has licensed less than a dozen Exchange Companies that document all buy and sell transactions and report these to SBP. But, because of lure of the kerb, Exchange companies still are handling only a part of the forex business. Given the fear of “the official,” Exchange Companies’s share o forex business may increase only slowly.
The apprehension is, after the two year deadline is over and the licensed money changers are abolished, a good part of the forex business will go underground and form a “grey market” if not a “black market.” What Messrs. Snow and Aziz are going to do in that eventuality?
The overall size of funds, channelled by the expatriate into the kerb market, has no doubt, declined over the past two years. Part of the reason is appreciation of the rupee by more than 11.6 percent against the greenback, as remittances through the banks increased, thereby enlarging the supply.
The expatriates’ home remittances, including those from the Gulf, Saudi Arabia and North America, nearly doubled to $ 4.23 billion in fiscal 2003—up from $2.13 billion in 2002.
Dollar is currently quoted at around Rs57.75/57.80 in the kerb. The SPB claims, if it was not purchasing dollar from the interbank market, the dollar rate will go down further against the rupee.
SBP and the government’s capital market regulator, Security & Exchange Commission of Pakistan (SECP) have just banned, or put on notice to stop operations, nearly two dozen “exchange and investment” companies that were illegally operating. More are sprouting.
If this is the tip of the iceberg, will the entire kerb and unofficial forex operations cease, or become bigger, and go underground? What will be the determinant? What does the 31 percent decline of home remittances from the United States and United Arab Emirates—and 14 percent overall— in first quarter of fiscal 2004 show? Doesn’t it mean more money shifting gears and coming via ‘hundi’?
Should’ more remittances be coming here now closer to Ramazan and Eid which is historically true? Why didn’t it happen? Will greater spread, and a larger premium in the grey market, despite stiffer American policing— or because of it— mean more business going to it?