LAHORE
Billions of dollars are flying out of Pakistan through unofficial channels including under-invoicing and misdeclaration every year and the government seems to be helpless to control the trend, as many politicians, senior government officials and money changers are reportedly involved in money-laundering.
Hawala and hundi are the major channels being used for the purpose, besides a number of networks indulged in the illegal cross border trade of foreign exchange. Moreover, anti-investment atmosphere, inconsistency in policies, prolonged energy crisis and absence of an efficient regulatory system have also forced different industrial sectors including multinationals to wrap up their production units just in a couple of years, a serious blow to already worse economic condition of the country.
A forex dealer on condition of anonymity said that more than 2 billion dollars of foreign exchange is being transferred to Dubai and some other countries per year through illegal channels. He said that government introduced the Anti-Money Laundering Amended Bill 2014 in parliament to incorporate tax evasion crimes in the schedule of offences of the Anti-Money Laundering Act 2010. The government promised to implement the AML framework in its true spirit to facilitate the tax evasion and detection of potential cases of abuse of investment schemes to launder criminal proceeds. The anti-terrorism amendment ordinance has also been enacted as a permanent law in line with the action plan agreed with the Financial Action Task Force (FATF) on demand of the IMF.
A banking sector source said that efforts on the legal side are encouraging but their implementation on the ground never proved to be satisfactory. This is gauged from the fact that state institutions had frozen just about Rs1 billion belonging to proscribed organisations in almost a decade. Quoting the official record presented to the parliament, he said that the financial monitoring unit received around 6,000 reports of Suspicious Transactions or Currency Transaction Reports from financial institutions, of which it passed over 1,000 to 4 different law enforcement agencies, while 350 cases were forwarded to the FIA, which took action and arrested 270 people, besides freezing 200 bank accounts. But unfortunately, only a few among these have reached courts. He added that Pakistan was among 11 countries that had not made sufficient progress for an action plan developed with the FATF to address deficiencies related to Anti-Money Laundering or CFT.
According to Dubai Land Department (DLD) statistics, during the last one a half year, Pakistani investors have invested a huge amount of $2.6 billion in the property market in the UAE; 90% of it in Dubai. Pakistan’s booming stock market has given investors huge returns of over 120 per cent over the past three years and the 15-20% growth in large-scale construction activity has seen developers enjoy massive profits. And Dubai is their favourite destination to re-invest their earnings.
“Pakistanis are believed to be the third-biggest investors in Dubai real estate after Americans and Indians,” said bayut.com Chief Executive Officer Haider Ali Khan. Experts predict that an additional $7 billion went to Dubai market through irregular routes, such as hundi, over the past two years. Exsperts said that investor confidence in the real estate market of Pakistan has started falling once again as capital flight to Dubai’s property market in the first half of 2014 is recorded at $1.23 billion.
Dubai Land Department (DLD) has reported that total of 17,289 real estate transactions worth AED37.5b ($10.2b) were conducted in the first half of this year. DLD ‘s list included the amount of real estate transactions conducted by foreign nationals, with investors from India, Pakistan, Britain, Canada, Russia, China, USA, France and Afghanistan involved in 14,231 property deals worth a total of AED30.533b ($8.3b) for the first half of 2014.
“No one can provide authentic data, even a rough data, on how much capital has been transferred abroad so far via unofficial means,” Dr Salman Shah, a former federal finance minister said. He said liberalisation of trade policy, unchecked tax evasion and higher duties on smuggling-prone items are causing a high level of capital outflow from the country.
Experts say the government should take concrete measures to curb the illegal trading of products and foreign exchange in Pakistan and the corridors across the Pakistan-Afghanistan.
Pakistan Pharmaceutical Manufacturers Association former chairman Shahzeb Akram was of the view that anti-investment environment and absence of an effective regulatory system have forced around five multinational pharma manufacturers to wrap up their production units just in a couple of years.
World-known pharmaceutical multinationals, including Bristol-Myers Squibb, Merck Sharp & Dohme Limited, Searle Pharmaceuticals and Organon, have been expanding their business all over the world including India, however, the situation is opposite in Pakistan, where they have ended operations, he said.
Industry sources said that crisis in pharmaceutical industry is getting worst as the manufacturing of different medicines were suspended first, and now multinational companies in particular are planning their closure gradually in Pakistan.
According to the APBF founding chairman Syed Nabeel Hashmi, the recent horrific report of intentionally burning over 250 workers in a garment factory in Karachi, has started forcing the manufacturers to shut down their production plants, already incurring stringent operational losses and lack of government’s commitments and interest towards foreign investors.
According to him, more than 40% of the textile industry and around 200,000 power looms have been shifted to Bangladesh and other foreign countries in the last five years, causing employment problems. Following the relocation of industrial units thousands of families, who were dependent on daily wages, are finding it difficult to make both ends meet due to job losses. In the whole Punjab, 200,000 families have been directly and indirectly affected.
Following the textile value-added industry, the steel sector of the country is also shifting its capital to foreign countries as at least $200 million investment in steel industry has gone out of the country during last two years, due to FBR’s unjustified policies and double taxation, coupled with the apathy of the EDB and energy issues in the country. “The biggest cause of the under-development of Pakistan’s steel sector is that the full potential of our country’s natural resources has never been fully realised until now,” observed PSMA ex-chairman Mian Saeed.
FPCCI President Mian Adrees said that that administrative action, fiscal measures and above all political will are needed to curb under-invoicing and smuggling that are the biggest threats to the economy. He said that the menace of smuggling/under-invoicing was not only eating up huge government revenue but also hitting the genuine businessmen very hard.
According to FBR sources, country loses about Rs 150 billion each year to under-invoicing in imported goods. This is part of the Rs 600 billion lost each year due to tax evasion (smuggling), and misuse of concessionary duties.
Even though smuggling and leakages under the Afghan Transit Trade are frequently cited as major concerns by industry, under-invoiced and mis-declared imports, especially from UAE are considered to be worse since they have an advantage of formal customs clearance documents that allows them to feed into the formal economy.
LCCI President Ijaz Mumtaz observed that the GDP-customs duty collection ratio went down to 1.13 per cent from 1.72 per cent, the lowest in the region. Import-based facilitation policy has caused dumping of goods, damaged local industry and resulted in official trade deficit of over $10 billion. With under-invoicing factor, the actual trade deficit goes up to an estimated over $15 billion per year. There is a need to put in place a foolproof transit trade system in place. Imports have now increased to over Rs3000 billion from less than Rs1300 billion, but customs duty collection remains in the range of Rs.150 billion, only 5.3 percent of total imports whereas the duty slab has been increased from 25 to 35 per cent in the last two years.