The legal cover

As promised, the Presidential ordinance providing legal cover to the fourth amnesty scheme during the past five years announced by Prime Minister Shahid Khaqan Abbasi on Thursday was promulgated during the weekend. The most widely hailed component of the scheme by the business community is the bond issuance at 3 percent payable in rupees and, at the time of the payment of interest and/or principal, at the then prevalent dollar-rupee parity. This, analysts argue, has the capacity to generate up to 5 to 6 billion dollars if, and the if must be emphasized, the business community that banks its legitimate income in offshore accounts and allows these accounts to have part ownership of their businesses within Pakistan have a comfort level in the scheme and perceive that the scheme would be implemented in letter and spirit.
The Abbasi-led administration has astutely provided the amnesty scheme legal cover, so point out analysts, by announcing it about a week before the Supreme Court established 13-member committee is scheduled to submit its report on preparing legal guidelines to retrieve assets (liquid and fixed) held abroad by Pakistani nationals. The terms of reference of the committee are wide-ranging and include examining existing legal regime and practices, bilateral treaties and multilateral conventions that may be used to stem the unregulated outflow of foreign exchange from Pakistan, tracing undeclared assets held abroad by Pakistani citizens and retrieving such assets especially the ones generated with proceeds of crime. The argument is that the committee may take the ordinance as a given, which would then be reflected in the Supreme Court's verdict, and then no one, not even Imran Khan in the event that his party forms the next government in the Centre, would be able to challenge it. That may well be but even though the committee does have some government heavyweights yet it also has independent experts who may or may not support all the components of the amnesty scheme; besides the Supreme Court has also been challenging the performance of governments, federal and provincial, including the intent behind some legislation passed by the parliament.
Legitimate businesses forced to rely on setting up offshore accounts as a means to hedge the steady rupee depreciation (estimated at least at more than 6 percent per annum in the open market given the flawed economic policies of the current administration) would find the bond scheme attractive. However, it is relevant to note that business interest in the bond purchase would wane: (i) if they perceive that implementation would be dicey; (ii) at present the rate of return by Pakistani banks leave alone higher returns on other instruments are more than double 3 percent as well as the expected annual rupee depreciation that would be allowed; (iii) the reserves that provide support to the rupee rate are less than three months today and with Miftah Ismail having recently stated that they would go further down by around 2.5 billion dollars as a payment is due in June this year, depreciation may be higher than projected which, in turn would imply printing money to meet the payments on dollar bonds next year, when the first payment becomes due - a policy that would fuel domestic inflation which, in turn, would lead to higher input costs for the business community.
It is important to comprehend why assets are shifted overseas. The IMF in a study on amnesty schemes contends that businesses are driven by political uncertainty, high tax rates, the failing state syndrome, conflict within the country and coercive tax administration. Accordingly, as long as these drivers of capital flight are there, money will leave the country despite very intrusive regulatory or administrative blocking action. It is therefore of essence that the announced amnesty should be followed by an overhaul of the tax policies and administrative reforms of which this scheme should be an integral part to ensure its sustained success.