Sunday June 16, 2024

Reforming the forex policy

By Barnaby Plowright
September 16, 2023

When Great Britain ruled British India, policy was made to serve the purpose of London. Objectives were elaborated there, based on the geopolitical/strategic circumstances of the time. Many British laws are still in place today and these still affect 21st-century Pakistan. In its social and economic growth, Pakistan has been held back by some of these texts.

In 1939, the British passed the India Defence Act. World War II had just started and at a time of global human tragedy, London saw it as crucial that the outflow of capital should be restricted to the maximum. London wanted to know exactly where each rupee was and made sure none left its sight. This law served that purpose.

Fast forward to 1947 and the independence of Pakistan, some parts of this defence act were simply copied and pasted into the Foreign Exchange Regulation Act (1947). Since then, some changes have been made but these can be described as tweaks and have failed to deliver Pakistan with a competitive forex policy. The philosophy of FERA (1947) has remained intact and its objective remains the conservation of foreign exchange. and this is the basis of the Foreign Exchange Manual.

One could argue that this philosophy is the root cause of Pakistan’s current economic struggles. We cannot be surprised if today’s people and companies know how to navigate and perhaps, in some cases, bend the restrictive rules.

So much has changed since World War II and the subcontinent’s independence. Pakistan is now growing and competing in the 21st century. The laws that govern trade and the economy must be modern and cannot put Pakistan at a disadvantage with its regional and global competitors. Business stays young; we and the laws get old.

Before committing, investors (foreign and local) will evaluate the forex regulations. If 100 per cent forex retention is allowed for Pakistani businesses, investments will come. Today, Pakistani companies cannot retain their forex.

Investors want ecosystems in which they have every reason to declare investments and profits. This is currently not the case in Pakistan. The most obvious symptoms are the importance of the grey and dark economy, corruption and the preference of many business persons to keep their profits in an offshore company or even to generate added value in a third country.

It is alarming that few will venture in an export-focused process of value addition, when Pakistan is a champion at exporting raw products. It is not the result of a lack of skills, expertise or technology/machinery but because Pakistani companies and entrepreneurs do not have access to investor capital and to the international markets.

When Pakistan decides to implement ‘21st century’ competitive forex acts, the development of skills and upgrading of technology/machinery will naturally happen. Currently, if there were an Elon Musk in Pakistan, he would unfortunately migrate and grow his dream elsewhere.

First, let us remove the hurdles to local and foreign investments. Only then will the rest follow. Over so many years, many billions in investments have been committed in MOUs but what is it that is specifically required to go further than the MOU stage? Pakistan now has a trade deficit with Afghanistan. The list goes on.

Why is it that the gemstones and jewellery sector has never developed in Pakistan the way it has in India, Sri Lanka or Thailand? Why is it so complicated to get FDI for mineral mining activities?

Businesses trading in USD-denominated products must be suffering if they cannot rely on foreign-based companies helping them to ‘optimize’. To develop their networks in Pakistan, how can telecom companies keep making such large overseas payments with letters of credit (LCs)?

This LC process is impractical. But it is also embarrassing, when the SBP processes those LC requests in months. Pakistani companies should make their overseas payments directly themselves. This cannot be done without scrutiny and justification but if this is restricted, as it is today, the business community will utilize all the available loopholes.

Finally, how is it possible for Pakistanis to purchase gold in such amounts per capita, when its import is prohibited? But most importantly, what legal changes are needed to make gold imports legal and transparent? Pakistanis’ gold consumption is huge, despite the Foreign Exchange Manual and the compliant SRO 760. Local companies cannot purchase gold from overseas but can import this precious metal from overseas customers on consignment. Clearly, some of the gold remains in the county and is not returned to the overseas customer.

The first step towards reaching a viable solution to the examples listed above is precisely a modern forex regulation. Instead of studying how India managed to turn around its economy during the last two decades, most Pakistanis stare at its growth in awe. This behaviour is astonishing, given that India started with the same FERA. The FERA philosophy and objectives were the same in both India and Pakistan. Forex was thus treated as a scarce resource.

Today, Indian Prime Minister Narendra Modi claims that India will reach “developed status” by 2047. Despite the shared heritage of FERA, how is that possible?

For India, the economic turnaround started in 1991, when facing an economic crisis in many ways similar to the one faced by Pakistan today. Despite opposition from parliament, the then finance minister of India, Manmohan Singh, was allowed by P V Narasimha Rao to start deregulating the economy.

Then, in 1998, the Vajpayee government repealed FERA 1974 (which had already replaced FERA 1948). The Indian parliament enacted the Foreign Exchange Management Act (FEMA) on December 29, 1999.

FEMA was conceived with the notion that foreign exchange is an asset. FEMA targets were to attract foreign exchange and as a result, increase their reserves. This process promoted foreign payments and trade. The objective of FEMA is management of FOREX. For external trade and remittances, the need for prior approval from the Reserve Bank of India was eliminated and today, Indian companies are not required to convert their foreign remittances.

If forex regulations are satisfactory to investors, only then will they look at trading mechanisms. It is surprising that after excessively restricting the outflow of forex for so long, the State Bank of Pakistan does not understand why the business community has in return, restricted itself to the minimum inflows of forex.

In the case of Pakistan, trading mechanisms have and are still being reformed – but reforms in forex regulations are a taboo.

The writer has served as a member of the Prime Minister’s Task Force for Gems and

Jewelry. He can be reached at: