The Protection of Economic Reforms Act (PERA) was an incredible law in the sense that it attracted a great deal of support across the political divide. Attempts to rationalize the law were frequently scuttled on the claim that it would discourage investment, adversely affect investor sentiment, worsen forex situation, etc., none having a proven basis. The powerful would like to have a standing scheme that would enable regular cleansing of their dirty wealth.
In 2001, soon after 9/11, there was a real slump in the economy struggling as it was from a severe drought. The stock market had crashed, inflation was low because of low oil prices, reserves were modest and investments were non-existent. The then Chief Executive, General Pervez Musharraf, held a meeting to work out measures to address the problems on an urgent basis. Finance Division had proposed a two-fold reforms in the forex market. One, to remove the distortions discussed in this series and, two, to facilitate expatriates in sending their remittances through normal banking channels and for this purpose giving them some incentives on their arrival, like duty-free imports and facilitation desks on all airports. Foreign Exchange Remittance Cards Scheme was introduced as a consequence. The Chief Executive was surprised to see the harm continued to be inflicted by PERA despite the reforms his government had introduced in December 1999. He readily approved the reforms proposals including exclusion of the residents from the scope of the PERA. The Finance Minister had decided to announce the measures in a specially called press conference in Karachi as he was traveling to the city soon after the meeting.
The following afternoon, as he approached the venue of the press conference from his residence, he received a call from someone who was not present in the meeting where decisions were taken but had learnt of them. He expressed disfavour to the measures and asked the FM to have another meeting on his return with the boss and to hold on the announcement to this effect until then. The FM obliged and the second meeting was never held. Rather the country was caught up on those rumours that prompted yet another law, the Foreign Exchange (Protection) Ordinance 2001, to appease the beneficiaries of this distortion.
Numerous attempts were made subsequently but in wane. The SBP moved a number of proposals to reform the law as in its presence it felt forex management was becoming intractable.
Then in 2008, as a new era was dawning and one had hoped that the new managers would be more sympathetic to consider the reforms proposals. When Shaukat Tareen was appointed Finance Minister on 8-10-2008, he faced the most malicious attempt to undermine the forex regime. Rumours spread like a wild fire that the government was contemplating seizing Foreign currency accounts (FCAs) and bank lockers. It all happened when a commercial bank refused/delayed withdrawal of cash from an FCA on the plea that they had run out of cash and awaiting new supplies from the central bank. The panic was complete. It is difficult to imagine that only such a petty incident caused the panic. More likely, a coordinated campaign of rumours was spread to destabilize the country at a time when it was again faced with as bad an economic cycle as in 2001, but now because of a turbulent transition to a democratic polity on the face of global financial crisis that resulted in a massive increase in oil prices.
Tareen, who had gone to Peshawar to attend the funeral of his father-in-law and had returned to Karachi, was greeted by the press and media for his reaction to rumours. He may have heard them for the first time. He said 'over my dead body', thus quashing rumours to their core. But then the reforms agenda again slipped in the background.
The most recent attempt to reform the law was made by none other than the then Finance Minister, Senator Ishaq Dar, in late November 2016. During his tenure, he must have faced at least six occasions where he had to spend endless hours warding off the undue pressures on the exchange rate. He was extremely sensitive to exchange rate variation and would always fault money changers and exchange companies for the manipulation in the forex market. In his view, there was no economics behind the exchange rate determination. He had worked tirelessly to build the reserves and he considered them the ultimate measure of economic strength. So, on the conclusion of the Fund programme, when the reserves hit the mark of $24.5 billion in 2016, they started falling and exchange rate was also coming under pressure. The FM asked the State Bank to undertake an exercise of how much forex was remitted from the FCAs in the last few years. He got a shocking report that this was as much as $6 billion or more.
It was then that he started holding meetings with the concerned officials to plug the leakage. He took an informal oath of secrecy from the participants and warned that he would not hesitate keeping an eye on the movement of funds in their accounts to ensure that insiders would not benefit from the prior information of measures being adopted. His plan was to disallow FCAs to residents but perhaps also going further to disallow cash withdrawals in dollars. Only equivalent rupees would have been allowed. The logic was that all FCAs by residents were fed by local purchases of dollars. Many voices urged him to limit the measures to restrict residents from maintaining FCAs going forward (without affecting their current holdings) and opposed the proposed rupee conversion as it would again tantamount to freezing as was done in 1998, especially when the country had huge reserves. He then said he would discuss the final scheme with the prime minister and then finalize the draft law. It is not clear what response he got from the prime minister. But the matter was not pursued afterward.
It may be remembered that the PERA, at the end of the day, is an ordinary law and can be amended through another law. Thus, its protective value was limited in the sense that it was not a constitutional provision requiring two-thirds of parliamentary majority for its amendment. More importantly, as we noted in Part-I of this series, the law was in place in 1998, under the very government that enacted it in 1992, when the FCAs were frozen against the expressed protection under Section-10 of the PERA. However, there is no doubt that in its core, the law was popular among the powerful lobbies, and for this reason it remained a forceful piece of legislation. However, the time has come where the economic managers and other organs of the state should take cognizance of it distortionary nature and destabilizing character, and reform it. In the final part of this series, we would give recommendations for this purpose.
(The writer is former finance secretary)
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