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The forex bolt from the blue

Every time rupee slides against the US dollar, different theories come up from different sections of society.

The policies implemented by government are criticised and people are infuriated at the thought of inflation that might come up with this sudden rise in dollar prices.

Liberalization of retail sale of foreign currencies has the implications which are haunting our foreign exchange reserves and are behind money laundering, corruption and terror financing.

The exchange rate on May 9, 2008 against dollar was 67 rupees. After four months under Pakistan People’s Party (PPP),  the rupee dollar started sliding against dollar with Rs 4 and at the end of their term on March 24, 2013, a single dollar was priced at Rs98.

The PML(N) took over on June 5, 2013 and their term ended on May 31, 2018 with US dollar being sold at Rs115.

If we compare the 2008 exchange rate with that of 2018, 10 years slide of rupee accounts for Rs 48 in terms of percentage 32% approximately.

The reasons are numerous for this slide of almost on/third against dollar. Let’s have a look how and why the slide kept on even to this day.

The last bombshell demolishing took on weekend (Sunday). Sunday is the day where mostly or all the money changers (Foreign Exchange Companies FEC) are closed no possibility of huge buying from banks than how this sudden bombshell got fired.

It is a million dollar question to be answered by the present government and Federal Investigation Agency (FIA).

On October 11, 2018, one of the national newspaper reported that dollar and other foreign currencies smuggled through Iran border and FIA has provided details of 100 travelers.

Another news item $75,000 was seized at Islamabad airport from Thai person trying to smuggle this amount that comes Rs 9.2 million or on new exchange rate approximately Rs 10 million.

In one of his recent speeches, PM Khan mentioned that about $10 to $20 billion were laundered from Pakistan.

What factors contributing this humongous figure not being investigator, economist but just with common sense, if analyzed the answers will come up automatically.

Firstly, the foreign exchange companies are selling foreign currencies to individuals. Why retail sales are allowed, there seems no specific reason for it.

If internet payments are to be made all commercial banks ATM can be used for this purpose. If foreign exchange is required for Umrah or Hajj, again the pilgrims can take their ATMs/credit cards with them to make necessary payments or cash withdrawals.

For travelers, the ATM/Credit Cards are good enough. No one likes to carry cash and get into unnecessary hassle.

Payment to overseas colleges and universities should be transferred through banks so black money cannot be utilized for it or paid through Hawala or Hundi.

The main cause of convenience of huge amount of cash carry second easy access to foreign exchange availability at convenience of door steps from foreign exchange companies (FEC) without much fuss about reason for purchasing such huge amounts or regular amounts of foreign exchange.

These FECs are concerned with their profits nothing else. Who is buying for what purpose it is bought. The governments also never concerned with these issues.

Rather governments have helped the convenience of carrying huge amounts of currency notes by issuing high denomination currency notes like rupees 500, 1,000 and 5,000.

These denominations also help in corruption and terror financing.

These high denomination currency notes makes it easier to make big payments in cash can be made easily.

If someone want to make cash payment of Rs 10 million it can be done with 2,000 currency notes of 5000 denomination or 20 packets of 5000 denomination.

Whereas if nation has only maximum Rs 100 currency denomination it requires 100,000 currency notes or 1000 packets that makes it difficult to handle.

The high denomination currency notes give way to cash undocumented parallel economy, black money, corruption and terror financing.

Currently Pakistan facing almost all of these issues. The FATF delegation is in Pakistan for the steps planned and already implemented by government of Pakistan. Pakistan is already in the grey list because of the ailments caused by the higher denomination of currency notes.

So many economist in Ministry of Finance (MoF) no one has proposed demonetization (abolishing higher denomination of currency notes) of 500, 1000 and 5000 currency notes.
People tend to disagree with demonetization citing the example of India most recent demonetization, the failures in India was due to weak micro banking network, whereas Pakistan has very strong network of micro finance banking.

The demonetization in Pakistan should be initiated to bring back black money and cash undocumented economy in main stream documented economy. This undocumented economy accounts for 30% to 50% of the total economy of Pakistan.

The demonetization should be done through banking channel, that is whoever wants to exchange currency notes should open bank account with commercial bank or micro finance bank and deposit the demonetized currency in that account.

Through this there will be no liquidity issues as ATM cards and mobile banking available whether it is micro finance bank like easy paisa, jazz cash or any other with commercial banks internet banking is also available.

The ban on retail sale of foreign currency should be immediately implemented and demonetization should be initiated.

These two steps of demonetization and ban on retail sale of foreign currency will provide the very much needed breathing space to the government to look for other avenues.
The total Pakistan Economy is around $ 280 billion, the undocumented considered to be 30% accounts for $ 84 billion that can almost wipe off Pakistan’s debt.

Last month I also proposed usage of Data Warehousing and Artificial Intelligence for broadening the tax base and prevention of fake accounts and other financial white collar crimes and of all the things the unnecessary devaluation of Pakistani Rupee every now and then will come to a halt immediately if ban on retail sale of foreign currency is implemented before demonetization.

The government should collect data from all exchange companies how much foreign currency purchase between Sunday and Monday and further investigate the root cause of devaluation on weekend holidays.

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