In a four-part series (March 2018) we had reviewed the history of Protection of Economic Reforms Act (PERA), 1992 and the ills it has inflicted on the economy of Pakistan. We had given a set of eight recommendations to reform this legislation as its continued presence on the statute books would keep undermining macroeconomic stability. Our top recommendation was: "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".
In a surprising and welcoming move, the Government has introduced significant amendments in the PERA through the Finance Act, 2018. These amendments were not included in the original Finance Bill but were found in the final approved version. The essence of these amendments is in line with the proposals SBP has been advocating with the various Governments since the law was enacted in 1992.
The first amendment has removed the primacy and over-riding effect of PERA on several laws given in Section-3 of the Act, which stated: The provisions of this Act shall have effect notwithstanding anything contained in the Foreign Exchange Regulation Act, 1947 (VII of 1947), the Customs Act, 1969 (IV of 1969), the Income Tax Ordinance, 1979 (XXXI of 1979), or any other law for the time being in force.
In 2001 another law was enacted, called the Foreign Currency Accounts (Protection) Ordinance, which was promulgated to stem the possible run on such deposits at the time. The amendment in the Finance Act has replaced Section-3 by the following new language: This Act shall have effect notwithstanding anything contained in the Foreign Currency Accounts (Protection) Ordinance, 2001 (L of 2001).
Accordingly, the new amendment has not only removed the primacy of several laws originally provided but also allowed its own application notwithstanding anything contained even in the latter law on the subject of protection to FCAs. The overwhelming protection and undue superiority accorded to PERA has therefore been demolished. Of all the laws, over whom PERA was given primacy, perhaps the most significant is the removal of primacy over the Foreign Exchange Regulation Act (FERA), 1947. With the rehabilitation of FERA, the subject of PERA has now firmly gone in the hands of SBP/Ministry of Finance.
To appreciate the second amendment, which amended a major portion of Section-4 of PERA, we need to reproduce the original Section-4: All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell transfer and take out foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall anyone be questioned in regard to the same.
This unfettered liberty to hold and use foreign exchange has been circumscribed. In the italicized text, the underlined portion has been omitted. Accordingly, the two facilities of non-declaration as well as questions about sources of the forex holding have been withdrawn. What is more, in a later sub-section, another clause has been added which stipulates: cross border or inland movement of foreign currencies in cash exceeding US$ 10,000 or equivalent subject to such annual ceiling as may be prescribed by the State Bank of Pakistan. This is a very significant bar on the freedom to have access to foreign exchange and its free movement inside and outside Pakistan.
Third amendment relates to Section-5(3) which originally stipulated: The banks, shall maintain complete secrecy in respect of transactions in the foreign currency accounts. The following qualifier has been added before the full stop: except as otherwise required under the Foreign Exchange Regulation Act, 1947 (VII of 1947) or the Income Tax Ordinance, 2001 (XLIX of 2001).
Evidently, the secrecy afforded to FCAs has been withdrawn. This is again a major weakening of the law.
Fourth amendment is about Section-5(4) which originally stipulated: The State Bank of Pakistan or other banks shall not impose any restrictions on deposits in and withdrawals from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith.This freedom has been circumscribed by addition of two provisos introduced by the amendment, namely(a) provided that no cash shall be deposited in an account of a citizen of Pakistan, resident in Pakistan, unless the account holder is a filer as defined in the Income Tax Ordinance, 2001 (XLIX of 2001) and (2) provided further that the Federal Government may make rules governing deposits in and withdrawals from the foreign currency accounts.
This amendment is also very important as it would discourage access of FCAs by non-tax filers. However, the facility of allowing remittance of foreign exchange outside Pakistan after converting rupee into dollars and depositing them into FCAs remains intact for filers. Without addressing this aspect (as discussed below) the distortion would persist.
The above amendments would go a long way in reforming the distortionary nature of the PERA. However, in our view, these are not sufficient to stem the destabilizing features of this law. We briefly present the recommendations that would help to remove the remaining distortions of the law:
One, an ordinary Pakistani, who is neither traveling nor making any foreign purchases, does not need forex. 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 that impinges on our economic sovereignty. Therefore, the resident 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, residents should not be given the freedom to hold foreign exchange.
Two, FCAs may be allowed to residents, either individually or jointly, with a non-resident, provided these accounts would only be eligible to be fed 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.
Three, the non-residents would be allowed FCAs to be fed from inward remittances. However, cash withdrawals would be in local currency. Outward remittance would be allowed.
Four, 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 travel and no restrictions should be placed on this important facility because in its absence demand for black market in forex would emerge and thrive.