EDITORIAL: The crackdown on smuggling and illegal business of some exchange companies is yielding results in the shape of PKR appreciation as it is slowing down the conduit of money transfers through the hundi/hawala system.
But how sustainable is this would depend on whether the mechanism devised for this informal currency trade to continue and flourish can be stopped.
There are cases where the policy is designed in a way to encourage hundi/hawla. There are two notable cases discussed here. One is the import of used cars and the other import of gold.
In the case of used cars, officially and legally, commercial imports of used cars are not allowed. However, there is a facility available for expatriate citizens to send cars to Pakistan under three schemes – transfer of residence, gift, and personal baggage. This implies that non-resident Pakistanis can send cars for their own use and that of their family with payment of full duty.
There is no restriction (or time limitation) for them to sell a car in the secondary market or to register the said car in their or any of their family members names. Ostensibly, in most cases, it is the expats that import cars and then they sell these to dealers or end users.
However, in reality, it is the used car dealers that import these vehicles under the name of expatriate citizens, which is a gross abuse of the scheme as cars are being imported for the purpose of selling in the secondary market (or for direct use), and the payment is made through an informal hundi/hawala system.
There is a mechanism to it. The passport of an overseas Pakistani importing the car is attached and Proceeds Realisation Certificate (PRC) or Remittances Certificate (RC) are produced, and then the import duty is paid. In the early 2010s, this policy used to be extensively abused and there were no checks and balances in place. Overseas passports were available at dirty cheap prices for importing used cars.
Later, the government became a bit vigilant and started ensuring that passport and PRC/RC belonged to the same person, and the equivalent amount of duty was paid and remitted through the person in a certain period. In essence, that check increased the price of the passport being used; but the misuse continued.
It’s an open secret. It’s common knowledge that the overseas Pakistani importing car is not the importer or the end user, and only his documents are being used, while the payment will be made through an informal channel.
In fact, the policymakers were fully aware that this policy will facilitate the market of imported used vehicles and trade in the country and payments for these vehicles would be routed through the grey forex market (hundi).
Around 25,000 to 30,000 used cars were imported last year and out of them, 4,000-5,000 are luxury cars. This is around 20 percent of the market share.
There is no administrative control of these imports by State Bank of Pakistan (as no payment took place through interbank) whereas CKD car kits were allowed at 50 percent last year. The country is finding it hard to import raw material for medicines, but luxury cars are being imported at will.
In principle, there is nothing wrong with importing luxury or other cars. The government has imposed hefty duties on these, which is naturally limiting its numbers in the market place.
But what needs to be done is allowing commercial import of used cars, so the payments are made through formal channel — banks. As it stands right now, importers are paying full duties and taxes, and buyers are paying registration fees as they would on any cars they purchase but the payments are done through the grey market. This must end.
A similar argument holds true for jewellers. If someone buys jewellery, he or she pays in cash and does not get any receipt. The jeweller on record says that the buyer has provided him gold and he was just providing the service of making jewellery, when he, in fact, is selling gold as well.
But since the import of gold is not allowed (almost zero import from the formal system), and all import is done through smuggling and payment is made through hundi/hawala, the overall jewellery sector operates informally. The only solution here is that the government allows gold imports so payments can move to the formal banking system.
These examples demonstrate how policies are designed in a way for informal imports and informal payments to thrive.
Such practices push businesses in these sectors into grey area. There are issues of tax adjustments that give impetus to informal trade. If the government wants to sustainably limit smuggling and hundi/hawala, it should bring these sectors fully into the formal segment.
Copyright Business Recorder, 2023
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