Misplaced initiative

Collector Customs (Preventive), Tariq Huda, has revealed that the Customs Department has proposed to the State Bank of Pakistan (SBP) to disallow Pakistani citizens from taking more than 3,000 dollars abroad or place a cap of 25,000 dollars per person per annum. In addition, the suggestion is to disallow 15-year-olds and under to be allowed to carry any foreign currency while travelling abroad. This, if accepted, would override the 1998 notification issued by the SBP allowing any citizen to take out up to 10,000 dollars or equivalent foreign currency. The obvious objective is to arrest the slide of the rupee that has gathered momentum in recent weeks but since when has the rupee value become the concern of the Customs department is a matter that is intriguing to say the least. Whether this particular proposal has the capacity to achieve its objective is questionable but is sure to promote the informal market for foreign currency and other concomitant malpractices/corruption.
Regulating the outflow of foreign currency in cash through entry and exit points in the West is the norm but all that is required is a declaration to the customs in case the cash is in excess of the allowed limit. In the US and the UK this limit is 10,000 dollars and 10,000 euros respectively. And this is in spite of the fact that foreign currency movement through all kinds of financial institutions is legal. However, in the West any movement of foreign currency through financial institutions in excess of 10,000 dollars is monitored with the purpose of ensuring that money laundering, sourced to terror-related groups, drug traffickers or tax evaders, is identified and appropriately dealt with by the internal revenue collecting entities. No such system is in place in Pakistan.
Nawaz Sharif's earlier government allowed foreign currency inflow and outflow with the purpose of attempting to make Pakistan an attractive destination for foreign investors. This particular policy decision was appreciated by the general public and foreign exchange reserves in the country built up as a consequence. It was unfortunate that after the 28th May 1998 Chagai nuclear tests in response to the detonation of five nuclear tests by India, the Nawaz Sharif government decided to freeze foreign currency accounts, a decision that resulted in profound loss of market confidence; and it also spread panic. This decision is considered by many economists as the single most flawed decision by any government in Pakistan and it hit the middle-income earners the most, or supporters of Nawaz Sharif who paid their due taxes and were committed to staying in the country. There were unsubstantiated rumours at the time that the senior members of the Sharif Cabinet, aware of the impending freezing of accounts, had already transferred their money abroad - a rumour that further compromised the government's credibility and may well have accounted for the distribution of sweets when General Musharraf staged a bloodless coup on 12th October 1999.
The is evidence to suggest that putting a cap on foreign exchange cash movement at a lower rate than the internationally accepted 10,000 dollars per individual may well create a panic which would refuel the mistrust against the Nawaz Sharif administration that was so evident post-freezing of foreign exchange accounts. As matters stand today the dollarization of the economy is ongoing due to a steady and fast-paced erosion of the rupee value due partly to the fact that Pakistan is on an International Monetary Fund programme brooks no intervention in the market to allow the real value of the local currency to emerge as its nominal value and partly due to the budgetary fiscal policy stifling growth. In the event that the government takes a decision to limit the foreign currency allowed to citizens travelling abroad the dollarization would simply gather momentum and hawala/hundi become more attractive.
It is therefore imperative for the government to quickly move to quash rumours generated by Huda's statement that there would be a limit on the foreign currency cash outflows by citizens, as such administrative measures, experience shows, do not achieve the objective of checking the currency depreciation and instead may well promote it.