Aware that its finances are in shambles and need a large handout just to survive, the government of Pakistan has decided to tap the one resource – overseas Pakistanis – which it feels can be mobilised to see it through the present crisis. While the assumption is correct, the plan may not work as planned. Overseas Pakistanis have traditionally been willing to help, but they have been stung by repeated frauds and disappointments. Only a few years ago, then prime minister Nawaz Sharif promised constitutional guarantees for foreign-exchange accounts. An estimated US$11 billion were deposited in Pakistani banks. After the nuclear explosions to match India’s in May 1998, when all foreign-exchange bank accounts were frozen for fear of flight capital, only US$1 billion were left in those accounts: the rest had been stolen by the prime minister and his cronies. This grand larceny occurred despite constitutional guarantees, and the accounts remain frozen to this day, the money being available only in rupees at the low official rate.
Despite this bitter experience, the government hopes that it can persuade overseas Pakistanis to help again. At the moment it is concentrating on expatriate workers in the Middle East, especially the United Arab Emirates. Most of them have families in Pakistan for whose upkeep they are forced to send money. Official estimates put total remittances of overseas Pakistanis at $7 – $8 billion each year, of which barely $1 billion goes through official banking channels. The remainder is remitted through unofficial channels called “hundi.” The government plans to get at least half of this $8 billion remitted through official channels. There are several reasons why expatriate Pakistanis do not use government channels: the exchange rate is low compared to the open market, and they take too long to deliver. Sometimes officials have to be bribed to get money out of the bank.
The “hundi” system is extremely fast: money is usually delivered within 24 to 48 hours anywhere in Pakistan. The success of the “hundi” system can be gauged from the fact that in the UAE many Pakistani bank-officials themselves are involved in it. The bank manager’s brother or cousin in Pakistan may also be involved in the business. He uses the bank’s facilities – telephone, fax etc – to send instructions to Pakistan about the amount of money to be delivered to the appropriate party. Thus the “hundi” system has penetrated even official channels.
Desperate situations, however, demand desperate remedies. Pakistan’s financial predicament is now such that nothing the International Monetary Fund (IMF) prescribes can solve its economic problems. In fact, finance ministry officials have finally admitted that IMF-prescribed remedies – loans at extremely high rates from international lending institutions – have added to the country’s woes. This was repeatedly pointed out even by non-economists, but previous governments were not prepared to listen because they were looking for short-term solutions. The country’s total foreign-exchange liability now stands at $40 billion, requiring more than $4 billion annually in interest payments alone. The government feels that this amount can be realized through home remittances by overseas Pakistanis. In order to encourage the expatriates to use official channels, it is offering incentives such as free life-insurance and pensions. It also plans to regulate money-changers more formally before moving towards full capital account convertibility of the rupee. The United Bank Limited (UBL) in the UAE has come up with a novel scheme to encourage remittances through its branches. Under the proposed scheme, no fee will be charged for money transfer, which will be exchanged at the official rate, but the expatriate gets a bonus of 10 points redeemable for 10 dirhams on his next transfer if he were to remit at least Rs 7,000. This is designed to avoid a spiralling exchange-rate: whatever the bank-rate, money-changers simply pay a few extra rupees, making it impossible for the banks to compete.
The government has identified three categories of expatriates: workers, professionals and businessmen. Workers are being asked to remit at least $2,500 a year. The State Bank, in consultation with the State Life Insurance Corporation and banks, is working out special insurance-schemes for overseas workers. Professionals and white-collar workers abroad are being asked to remit $10,000 a year. The National Investment Trust and other state-controlled institutions and private banks have been advised to prepare special investment instruments and products to attract them. Similarly, Pakistani businessmen and traders abroad are being targeted; for them the Board of Investment has been asked to prepare a strategy of incentives and encouragements.
Remittances by workers abroad have mushroomed globally to nearly $100 billion annually. While remittances by Pakistanis account for only 8 percent of this, they are believed to have financial assets abroad in the form of investment and bank deposits worth about the size of the country’s GDP (estimated at $60 billion). The Board of Investment has been asked to develop a package of incentives to attract investment. A database of overseas Pakistanis is being compiled. Finance minister Shaukat Aziz says that there are a large number of overseas Pakistanis é at least 1,000 according to his estimate – who are successful businessmen. If their remittances come through official banking channels for investment purposes, no questions would be asked. Pakistani officials also cite China’s example: Chinese expatriates have remitted more than $60 billion to China in recent years.
The Chinese example is interesting but not applicable. China has achieved a growth rate of 10 percent annually for nearly 15 years; corruption in China has not achieved the dizzying heights of Pakistan, and China does not suffer from the kind of economic disparities that are a tragic feature of life in Pakistan. The Chinese elites do not suffer from the kind of complexes so widespread among the Pakistani elites. Finally, the Chinese leadership has shown a remarkable aptitude for managing their country’s affairs, something distinctly lacking among rulers in the “land of the pure.”
Pakistanis abroad might be forthcoming if two concerns were addressed. First they need iron-clad assurances that another government will not steal or freeze their accounts; Second, how are they to know that tthier remittances will not be frittered as previous ones have been? Accountability and attracting investors are contradictory policies being pursued simultaneously. In a rush to appear business-friendly, the gates are again being opened for crooks to take the country to the cleaners. The government has to give some convincing explanations before much money flows its way.