Automobile: This is the third most attractive activity of players in the ‘quasi’ casino economy in Pakistan. Relative to stock market and foreign currency it is less documented, more e-business oriented, but risk/return trade-off is lower. The possibility of earning ‘pseudo’ and ‘abnormal’ profits by the consumers and dealers in used/new cars are however present. When both stock market and foreign currency begin to lose shine in the immediate to short-run as in the current scenario, domestic hot money fuelled by tax-free agriculture incomes, other undocumented profits/incomes and remittances find an easy outlet in buying new cars even at a premium or trading in slightly used ones.
However, the dynamics of quick profit making or risk-return trade-off in the automobile market (even if it is for lemons!) based on imperfect information is not simple as in the stock market or dealing in foreign currency for the following reasons: It is a dual purpose commodity. As a consumer durable, a new car can be used for self-use and sold after a short period ranging from 6 months to 2 years.
Whether a profit or a loss is made depends not only on the model but in Pakistan it also depends on the expected depreciation of rupee, changes in the ex-factory price, local tax/fees structure and frequent change in auto policy. So far the experience of majority of stakeholders selling/buying cars within 2 years of purchase has been to recover the original purchase price or even above it, due to the above factors. Thus the inflows of hot domestic money into automobiles have ‘pseudo profit earning’ capacity.
The current hot automobile market even in this so called depressed incomes scenario is the release of pent-up demand due to Covid-19, increased agriculture incomes specifically of large landlords and access to low cost car financing loans by car dealers/consumers themselves who are explicit players in the ‘quasi’ casino economy.
The government also does not hesitate to tout this increased demand and its impact on rising employment and LSM Index (through its higher weightage), although 3-4 months down the road, higher imports of CKD units will begin to bite the exchange rate and it will become a self-filling prophecy of players in the casino economy.
Incidentally, in the last two years of the Nawaz Sharif government, the automobile market was also fuelled by the hot domestic money and some of the above factors.
Real Estate: If one buys real estate for personal use it is a long-term investment, but if it is traded to make quick and large profit it is an activity under the ‘quasi’ casino economy. Thanks to the ballooning population, inflows of formal and informal remittances, rapid urbanization and undocumented/untaxed profits originating in the real economy, there will always be a healthy demand and corresponding opportunities to earn large profits (as witnessed by the mushroom growth of contractors turned CEOs of construction companies since the 1990s) from this fourth activity. In recent years, attempts to reduce the casino tendencies by linking registration fees/capital gain tax to retention periods of open plots may have cut into the level of large profits during periods of booming property market. Nonetheless, real estate still remains the most undocumented, shrouded in secrecy and with low tax yields as majority of transactions are conducted bilaterally, namely among individual/families as buyer and seller. Also, the poor extent of formal ownership registration, and widespread under-reporting of ‘true’ transacted prices is an avenue for large profits with manageable risks. Currently, an ‘observational and data lag’ prevents casual empiricism of substantial outflow from the above first two activities into the real estate activity.
Prize Bonds: For many decades, prize bonds sponsored by the government to finance its deficit have been an almost perfect substitute for undocumented cash transactions that remained outside the banking sector on religious grounds, specifically by the wholesale and retail traders. It also yields a return of 10 percent and it becomes more attractive once nominal interest rates drop below 10 percent. Decades have passed and still there is no socio-demographic profile of holders of this alternate cash. Under pressure of the FATF, the government introduced registered prize bonds for large denomination, but whether it has put a dent in the casino economy remains unknown.
The remaining activities mentioned above in the ‘quasi’ casino economy are lumped together as they share few common attributes. First, the risks/returns to in/out flows are sensitive to expected international USD prices and depreciation/appreciation of the rupee in the immediate to short run, specifically gold and cereals. Gold is a dual use commodity. Traditionally, gold in our society is a store of value and a dowry item. The players in this activity of casino economy are also engaged in jewelry business which also remains one of the most undocumented sectors, but also has forward linkages in terms of exports/employment.
From a policy perspective, adaptive and rational expectations on exchange rate path and interest rate regime (including subsidized/mandatory) play a key role in delineating the contours of in/out flows of domestic hot money in a casino economy. If the governments consider it as a driver of real economy and rely on casino economy indicators to propagate sustained economic revival, it will be reluctant to bring it under any form of meaningful regulation/documentation as this process is more challenging than in formal sectors.
Copyright Business Recorder, 2020