Before giving our recommendations to reform the forex regime, let's share one more occasion regarding how powerful lobbies have consistently thwarted efforts to reform the Protection of the Economic Reforms Act (PERA), 1992. A senior FBR officer has narrated another episode in this regard. He said that in the budget proposals during mid-2000, the government had approved a proposal in the finance bill to remove the anomalous nature of PERA. While this was approved by the Cabinet, a very powerful cabinet minister, who came to know of the proposal during the Cabinet meeting (budget documents are seen by cabinet members only before the start of cabinet meeting on the day of budget), insisted for withdrawal of the proposal and was successful. Consequently, the budget speech was delayed, as was the laying of finance bill because amended proposals were to be placed before the Parliament. Later, an attempt to introduce a declaration for passengers carrying foreign currency was also undone.
Given this history, only a very determined government which is convinced of the incredible ills wrought on the country by this law would be able to reform it.
It is also important to realize that PERA stands out perhaps as a unique law in country's statute books on economic regulations. A law normally deals with a single subject in a comprehensive manner, such as the SBP Act 1956 (dealing with matters connected with the establishment, functions and working of SBP). The subjects covered under the PERA are diverse and unconnected. For instance, it deals with forex, foreign currency accounts, privatization and tax incentives offered to investors. In each of these subjects, there is a parent law regulated by three different departments, namely ministry of finance (SBP), Privatisation Commission and FBR. A law that aims to enact provisions in multiple laws is the Money Bill or the Finance Act, since it carries taxation proposals of the Government during the passage of annual budget. Clearly, PERA was not a Finance Act and as such it needs major reform.
Our foremost recommendation is that the need for such a law, if at all it was felt at the time, is no longer there and its reform should first include housing of its provisions in the respective laws to which they belong. Accordingly, Sections-4, 5, 8, 9 and 10 (dealing with holding of forex, FCAs, foreign protection of investment, protection of financial obligations and secrecy of banking transactions) should be suitably built within the laws of SBP (as discussed below), Section-6 may go to Ordinance 2001 and Section-7 should be addressed within the laws under its jurisdiction.
Finally, we may make the following recommendations: First, we must restore the primacy of Foreign Exchange Regulation Act (FERA) 1947 in regulating the foreign exchange business in the country. The facilities that one would like to offer to citizens can be offered within that framework. Prior to PERA, all relaxations in forex regime were allowed within the framework of FERA. For example, FCAs were allowed within the framework of FERA. Accordingly, FERA already has the necessary capacity to administer a dynamic forex regime.
Second, the need for an ordinary Pakistani to hold foreign exchange, who is neither traveling nor making any foreign purchases, is simply not there. The unbridled liberty afforded under Section-4 of PERA is thus unwarranted and unwise. Even though it may sound that the law is facilitating ordinary people, in reality this is not the case. The beneficiaries of this largess are those engaged in dollarization or siphoning their legal or illegal wealth abroad. It is, therefore, a distortion that frequently destabilizes external account and confounds Pakistan's dependence on outside help, which compromises our economic sovereignty.
Therefore, the residents will not normally be allowed to hold foreign exchange except when returning from abroad, in which case he would be required to surrender it to the authorized dealers. Accordingly, we strongly recommend that residents should not be given the freedom to hold foreign exchange.
Third, FCAs may be allowed to residents, either individually or jointly with a non-resident, provided these accounts would only be eligible to be fed these accounts through inward remittances. They will also have the facility to remit these deposits abroad. However, cash withdrawal from FCAs would only be made in the local currency. Residents who are returning from abroad and bringing home their savings would also be allowed deposit of their savings even if this is in cash. But cash withdrawals would only be allowed in the local currency.
Fourth, the non-residents would be allowed FCAs to be fed from inward remittances. However, cash withdrawals would be in local currency. Outward remittance would obviously be possible.
Fifth, remittances from abroad should continue to enjoy tax exemption under section 111(4) of Income Tax Ordinance, 2001. But this exemption would not provide immunity from anti-money laundering laws.
Fifth, since Pakistan has allowed current account convertibility, all authorized dealers should make easy for ordinary people to obtain needed foreign exchange for the purpose of trade in goods and services and no restrictions should be placed on this important facility because in its absence demand for black market in forex would emerge and thrive.
Sixth, the money changers and exchange companies have introduced new elements to the forex regime which were absent before 1991. The regulations for these entities, particularly for money changers, are lax and need to be tightened. The fundamental requirement for authorized dealers, exchange companies and money changers has to be to obtain the antecedents of the transactor (such as NIC) and a declaration regarding the purpose for the purchase.
Seventh, no resident shall be allowed to hold an account in a foreign jurisdiction, foreign security, or foreign immovable property unless it was purchased from the income and wealth earned or acquired while he was resident outside.
Eighth, all reforms would be prospective and existing FCAs and deposits thereof would continue to be governed by the previous regime. New FCAs and further deposits in the old FCAs would be subject to the new regime.
Some people may say that the reforms proposed above would be a pushback in the past when P-form was the primary instrument of forex control. Clearly, this would be an exaggeration, as the current account convertibility would ensure that no P-form type of regime emerges. Besides, we have preserved the emergence of exchange companies and money changers. There are two fundamental objectives we aim to achieve from the proposed reforms. First, residents should not deal in foreign currency nor accumulate it in their home or in the bank lockers. This would stop the process of dollarization as well as shut the door on transferring wealth abroad, either in accounts, or securities or immovable properties. Second, those who deal in foreign currency for the purchase of trade or acquisition of foreign services (education, health, royalties, technical fees, etc.) must all declare their antecedents as well as declare the purpose of these transactions.
This is a normal regime for a country that faces a real constraint of having hard currency in sufficient quantitates. As we said in the beginning of this series, even in India the forex regime is organized along the above lines despite having $420 billion in foreign exchange reserves. We don't have even 10% of this amount and yet we have ended up practicing a regime that was comparable to Gulf countries. This has to stop if we want the country to be insulated from the periodic need of rushing for IMF support.
(Concluded)
(The writer is former finance secretary)
[email protected]
Comments
Comments are closed.