Pakistan forex raid just the start
By Syed Fazl-e-Haider
QUETTA, Pakistan - The Pakistan government, battling to rescue a tumbling
rupee while seeking to raise billions of dollars to stave off a debt default, last week
raided the country's top currency exchange company and arrested its senior
executives in an attempt to staunch a hemorrhage of dollars out of the country
through illegal transactions. More arrests may follow, possibly including
senior politicians and businessmen, according to the government.
About US$10 billion has reportedly been transferred in the past year through
the two most popular channels of illegal transfer of foreign currency, known as
the hawala and hundi systems. The
Ministry of the Interior said about 40 billion rupees (US$500 million) had been
shifted from Pakistan in just the past one month.
The dollar smuggling has helped drive rapid depletion in the country's foreign
exchange reserves, which have shrunk to $6.76 billion from over $16.5 billion
in October last year, in turn causing a loss of confidence in the stock market.
The movement into dollars for smuggling has also helped to erode the value of
the rupee, which has lost about 31% against the US dollar this year.
Friday's raid by the Federal Investigation Agency (FIA) on the offices of
Khanani & Kalia International (Pvt) Ltd (KKI), the country's largest
exchange company, was combined with the arrest of chief executive Munaf Kalia
and his partner Javed Khanani, along with three other foreign exchange dealers.
The KKI head office in Karachi has been sealed off and the computer data and
other evidence seized to help investigations into whether the arrested men were
involved in money laundering. The central bank on Monday suspended KKI's
license for 30 days with immediate effect for violation of rules and
regulations.
FIA team also raided a KKI office in Islamabad, and took into custody records
which they said showed illegal transfers of up to 36.86 billion rupees (US$460
million). Nearly 1,000 lost and fake identity cards have also been seized from
officials of the Pakistan Post and the National Database Registration Authority
(NADRA). The ID cards were allegedly used to obtain bank loans and for credit
card and property fraud.
Further raids and arrests are expected, with the FIA acting in cooperation with
the central bank, reports said.
FIA is keeping confidential the information gathered from Kalia and Khanani,
who are being interrogated for information and names of politicians,
bureaucrats and businessmen involved in the alleged laundering of funds and
currency smuggling.
"The investigation agencies are trying to extract information from the accused
as to how bureaucrats, politicians, businessmen and other influential people
transferred money to their children for education and as installments for
expensive properties abroad," Online news agency reported. Javed has disclosed
the names of some very influential people whose money he had sent abroad, the
Daily News reported, citing FIA director-general Tariq Pervaiz.
The government has vowed to bring people involved in the illegal transfer of
dollars to book, irrespective of their influence. "If any political bigwigs
were found involved in the scandal, they will also be punished in line with the
law," said Shaukat Tareen, a financial adviser to the prime minister.
The arrests come as Pakistan reluctantly turns to the International Monetary
Fund (IMF) for a US$9 billion loan, Dawn News channel reported, citing
unidentified Finance Ministry officials. Further funding is also being sought
from the group known as Friends of Pakistan, which includes the US, Britain,
China and Saudi Arabia.
The government, which is urgently in need of funds to pay $3 billion in debt
servicing costs due in the coming year, has sought to avoid IMF funds on
concern over terms that would come with any loan. Prime Minister Asif Ali
Zardari came back empty-handed after earlier approaches to China. The IMF says
Pakistan needs $10 billion to avoid defaulting on its debt. IMF-imposed terms
could include higher interest rates and reduction of subsidies, hurting
businesses and other sectors of the economy.
Economic adviser Tareen said on Friday that Pakistan would make a decision on
seeking financial help from the IMF after November 10, raising speculation that
the exchange crackdown was related to the IMF deal.
Following the KKI arrests on Friday, money changers in Peshawar, North-West
Frontier Province, had gone underground, according to The Daily News. The city
serves as a vital gateway to Afghanistan, including for transfers of cash
between the two countries without involving banks. About 400 currency dealers
operate in Peshawar, primarily in the markets of Andar Shehr and Chowk Yadgar.
Only about 32 are registered, while about 700 Afghans are reportedly involved
in the illegal hundi and hawala transfer systems.
Future action by the FIA will be aimed at countering various methods used for
the flight of foreign currency, including under- and over-invoicing by
exporters and importers, according to media reports.
Officials believe the crackdown could have a positive impact on the weakening
rupee against the US dollar in the open market. The rupee traded firmer at
80.65/75 to the dollar in the interbank market on Monday compared with
Saturday's closing of 81.00/10. The currency's plunge of 31% this year has
driven up import costs and helped to fuel inflation, which in October rose to
25%, close to a 30-year high.
The nation's foreign reserves have meanwhile shrunk to $3.7 billion from $14.2
billion a year ago, and Pakistan's credit rating was lowered last month on
concern the nation won't be able to pay its overseas debt because of the
decline in foreign reserves.
As the central bank's reserves are not enough to sell in the market, only a big
inflow of foreign exchange can strengthen the rupee or at least save it from
further weakening. The erosion in the value of the local currency has also sent
distress signals to investors in the local stock market, with portfolio
investment plunging 24% in July and August from a year earlier to $110.9
million from $146.5 million.
The central bank in May, seeking to stabilize the rupee, stopped exchange
companies from sending cash abroad in dollars, pounds sterling, euros and
United Arab Emirate dirham. The central bank had already warned money changers
to refrain from illegal transfers and the Interior Ministry set up a FIA cell
to deal with the issue.
The Forex Association of Pakistan (FAP), which collects $7 billion in foreign
exchange annually, has warned that if the FIA harassed money changers they
would close their businesses, depriving the country of remittances from
Pakistanis working abroad. In 1998, the government of prime minister Nawaz
Sharif initiated a similar crackdown, which was stopped on the request of the
FAP.
The latest crackdown involved illegal transactions and would have "no negative
consequences" on remittances by expatriates, the Daily Dawn quoted a government
official as saying.
Some analysts questioned the central bank's capacity to regulate and monitor
foreign exchange companies, asking why the bank's analysts and auditors could
not detect any faults in the transactions of companies such as KKI, which must
keep the central bank informed of all transactions.
KKI, a joint venture of business groups Khanani and Kalia, was the country's
first exchange company after the central bank, seeking to improve documentation
in the economy, in 2003 converted money changers into exchange companies.
Since its transition as an exchange company, KKI evolved as a leader in the
diversified currency exchange business with a wide variety of customer
services. It is the only ISO 9001:2000 certified (Quality Management System)
exchange company in the country.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including The
Economic Development of Balochistan, published in May 2004.
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