The success of the latest amnesty scheme hinges upon the surety that no criminal proceedings will be initiated against the claimants of amnesty scheme once they declare their assets. In other words, people looking to benefit from the scheme are wary of courts and the reaction of other political parties to the scheme. This is why not even an iota of asset has yet been declared in the two weeks since the announcement of the scheme.

However, one unintended ‘bad’ consequence is already quite visible: the pressure on PKR in the open market. The rupee in kerb market reached at 118.3 against the USD, while in the interbank market its trading at 115.6. The spread is a little too high and it needs some contemplation.

Why has the demand of foreign currency suddenly risen in the open market? It can be linked to two points of amnesty scheme. First, that non-filers cannot open foreign currency (FE25) account, or if they have existing accounts they cannot deposit any further amount in their account until they become filers. The other element is that the non-filer cannot buy real estate in Pakistan from the start of next fiscal year.

These two fine points can simply make the scheme counterproductive. In recent history, the steps taken to penalise non-filers or incentivising them to file have actually resulted in more adverse consequences. With the increase in differential in WHT on filers and non-filers, the ratio of currency-in-circulation (CIC) to money supply (M2) as well as the ratio of Prize Bonds to National saving (NSS) has worsened.

From the day when the banking transaction tax was imposed on non-filers to date, the ratio of CIC/M2 and the ratio of prize-bond-to-NSS has jumped substantially (See table). Then there were other consequences of higher taxes on non-filers; for instance, many have taken higher rate as a final tax and have passed it on to consumers by jacking up the prices.

Since the non-filers did not intend to come into the tax net, those filers (acting as withholding agent) buying intermediate goods and services from non-filers have to bear the brunt of taxes of non-filers. This has enhanced the cost of doing business, in terms of paying taxes and time spent on compliance, for filers. The corporatisation is discouraged in the process.

These are loud and clear indications that if non-filers are not interested in coming into the tax net irrespective of how lucrative the scheme may be the penalties on non-filers will only further increase the informality – which is the exact opposite of the objective of the scheme.

The same also seems to be happening now. BR Research’s channel checks confirm that at least one big bank is not allowing the transfer of money outside Pakistan from FE25 accounts. Although there is no official word on such move, this can result in people opting for hundi to remit monies outside.

When the intention of the amnesty scheme is to open the legal conduit for taking money into the country, how can banks simultaneously close the legal route to take the money out? The polices cannot be liberalised by one-way traffic.

It therefore appears – based on preliminary reading of the market pulse - that those who do not want to declare their assets; will like to become more informal. The market estimates that out of between 350,000 to 600,000 FE-25 accounts, only 25 to 30 thousand are those who are filers. Now even if these non-filers are not withdrawing the money from their existing accounts, they are reportedly buying their incremental foreign currency from the open market. And those non-filers, who were parking major chunk of their savings into real estate, are also now expected to divert these funds to buy foreign currency from the open market.

Concurrently, there is an inevitable pressure on the currency to depreciate as the IMF has recently said that the corrective measures are to be taken by the next government. Expectations abound that rupee will fall in a few months and since non-filers are going to be short of investment avenues, they have already started buying foreign currency from the open market. This can make the situation ‘ugly’ as the self-prophecy of currency depreciation could happen before its even due.