A Hawala Tsunami?

A couple of months back, when the SBP Governor visited the FPCCI office in Karachi, the traders and industrialists attempted to hand him the keys to their offices and factories. Right after that, SBP announced a deferred payment or self-funded scheme in which importers were allowed to import on a deferred payment basis, preferably from sister concerns of importers, beyond 365 days from the shipment date.

The SME industry sources are sensing that this scheme is gaining traction fast, and the hawala demand may soon go through the roof. However, this provision (or facilitation) can be misused by scrupulous elements to import non-essential items.

Seeing the volatility of PKR amid economic and political instability, it is virtually impossible for any genuine supplier to allow a 365-day payment deferral to an importer in Pakistan. Therefore, what is happening on the ground is that commercial importers and manufacturers in Pakistan are making arrangements in Dubai, either by setting up their own company in Dubai or by using a 3rd party, to establish a 365-day deferred payment bank contract with their importing company in Pakistan.

And the modus operandi is to have 100 percent payment to the original foreign supplier by the Pakistani importer through the Hawala channel. However, the import documentation is done with Dubai's self-owned or 3rd party dummy exporter. The goods are then imported and sold inside Pakistan. The local importer records it as a 365-day credit purchase from their Dubai supplier (self-owned company). Payment will be sent at the official exchange rate through the SBP after 365 days.

The consequences of the above practice are dire. One is that despite the government's best efforts, the Hawala rate in the market continues to increase unchecked due to demand for these illicit import payments. With the increased demand for Hawala transactions, the Hundi rates also rise. Hence, overseas Pakistani use Hundi instead of banking channels to send remittances to Pakistan, resulting in a drop in foreign remittances and impacting the current account deficit. Already the remittances from the official channels are down by 11% in 8MFY23.

Since the organized sector cannot import these non-essential items or their raw materials, there is a shortage in the market. The scrupulous elements are and will keep misusing the 365-day deferred payment scheme to make excessive profits in this shortage economy. In this fashion, the unorganized and undocumented sector flourishes. At the same time, organized industry, a provider of employment, suffers and would have no option but to lay off its workforce, leading to growing unemployment.

Interestingly, many USD payments against these deferred imports will be required after 365 days. The economy may destabilize when these contracts are settled upon maturity. Or these would lapse without any payment.

One example is that of the mobile phones. Here banks are not allowed by SBP to open LCs for CKD imports by local manufacturers since Dec 27, 2022. Some manufacturers are closed due to a shortage of materials. The workers and engineers have been laid off. Most Chinese staff has gone back or is preparing to return to China. The implication is a significant shortage of phones. And now CBU imports have started. Banks are opening contracts for importing CBU mobile phones under 365 days deferred payment facility, which is nothing but 100 percent hawala business. This is happening across several sectors - a usual phenomenon of Dar strategy where traders are supported, and parallel channels of financial flows spur while killing industrial players.

The only sectors that may have escaped this disaster are those indulged in exports, pharmaceuticals, or those using local raw materials such as cement, fertilizer, and agricultural processing units. On the other hand, the sectors suffering the most include automobiles and auto parts vendors, mobile phone manufacturers, home appliances, chemicals, steel and building materials, etc.

The auto industry alone claims to employ 2 million Pakistanis to produce cars, motorcycles, tractors, trucks, and buses. Similarly, the mobile phone industry has created 40,000 direct and indirect jobs due to investment by renowned global brands.

It's hard to estimate the exact figure of hawala demand due to this scheme. But it would run into hundreds of millions of dollars per month. All of this will jack up the hawala rate diverting inflows from the official to the hundi channel and killing the industry.

It is recommended to withdraw that 365-day deferred payment as it is causing harm by encouraging the black economy, impacting the inflow of remittances, and causing job losses in the organized sector. If the government wishes to continue the scheme to facilitate genuine importers, it may be restricted only to importing essential items as prescribed by the SBP from time to time. Import of non-essential items may not be allowed under the 365-day deferred scheme. Then a non-remunerative statutory margin of 50 percent may be applied for 365-day deferred payment imports.