KARACHI - Billions of dollars are flying out of Pakistan through unofficial channels and the government and the State Bank of Pakistan seem to have failed to control the trend, as many politicians, officials and money changers are allegedly involved in the illegality. Hawala and hundi are the major channels being used for the purpose. In case the trend was not discouraged, the economy, already in a very bad shape, would nosedive, experts say. There are a number of networks allegedly indulged in the illegitimate cross border trade of foreign exchange, violating the relevant laws. A forex dealer on condition of anonymity told this scribe that more than one billion dollars in foreign exchange is being transferred to Dubai and some other countries per year through clandestine channels. Investors seem unwilling to invest in Pakistan and they have been transferring their assets and funds to foreign countries since 2008. However, a senior banker, who deals in the foreign exchange department of the central bank, said every single penny which is routed through any channel other than banking is illegal. No one can provide an authentic data, even a rough data, on how much capital has been transferred abroad so far via unofficial means. Like any other remittances system, hawala mode of transaction can, and does, play an important role in facilitating money laundering practices across the region. Dr Salman Shah, a former federal finance minister, while talking to The Nation, said despite all- time record-high remittances, foreign exchange reserves and stable exchange rate, one should not be surprised to see the appearance of the phenomenon of flight of capital on the economic scene of the country. 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. Although, the government has reduced a regulatory duty on 398 smuggling-prone items, most of them included in Afghan Transit Trade in the budget 2011-12, the duty rates remained high. 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. The customs tariffs were nominal till 2008, but the present government has started increasing customs duties rate on the trade of many products. Responding to a query, the former minister said, some of the industrial units are being shifting from Pakistan to Bangladesh, China and Malaysia due to less-conducive business environment, worsening security situation and lingering energy crisis. This trend is another case of flight of capital from Pakistan. Sayem Ali, a senior economist at Standard Chartered Bank, said official statistics on balance of payments and private transfers do not reflect a situation that the country is facing flight of capital via formal channels. Pakistans investment indicators seem reasonable at least in the short-term, he said. He opined that the local capital and money markets are stable, posting a decent inflow of capital into the country. Banks are well capitalised and solvent and their asset holding ratios are good due to prudential and vigilant policies of the SBP. The remittances have crossed the $11 billion mark in FY11. After a gap of seven years, Pakistans current account stood at surplus of US$542 million in FY11 as against a deficit of US$3.9 billion last year. However, net foreign investment in Pakistan fell 8.6 per cent to $1.53 billion in the first 10 months of 2010-11 fiscal year because of a decrease in foreign direct investment, he said. Despite all these positive developments in the external sector, circular debt issue of the energy companies will remain a major source of concern for the government and the investors in long-term The financial inflow of workers remittances is neither invested in stock market nor utilized in real estate business. But it is being invested in gold market to some extent, a forex dealer said. Pakistan enacted a new Anti-Money Laundering Law in March 2010, creating a permanent Anti-Money Laundering and Combating the Financing of Terrorism AML/CFT framework According to the Asia/Pacific Group (APG) report on Money Laundering, Pakistan is failing to fully comply with most recommendations and special recommendations made by APG authorities. Only six recommendations were awarded a level of full compliance. Notably, among the six core recommendations and special recommendations (as defined by the FATF), the APG rated Pakistan partially compliant with all six. A country needs a rating of compliant or largely compliant to be considered as having in place an effective AML/CFT regime, the report stated. It is pertinent to mention here that the National Assembly had adopted Anti-Money Laundering Bill 2009 in January 2010, suggesting one to 10 years imprisonment and a fine up to Rs 1000,000 on violation of the law. Financial Action Task Force (FATF) and Asian Pacific Group which are responsible for monitoring compliance of AML/Combating Financing Terrorism (CFT) regime by member countries had raised serious reservations on certain provisions of AML Bill 2007. For punishments, the bill provided, whosoever commits offences of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than one year but may extend to ten years and shall also be liable to fine which may extend to Rs one million and shall also be liable to forfeiture of property involved in the money laundering. The Anti-Money Laundering Law was aimed at preventing money laundering, countering financing to terrorism and bringing the law in consonance with the internationally accepted standards to check corruption and illegal wrong use of money. Earlier, the SBP had issued orders in May, 2008 to stop exchange companies from sending cash abroad in Dollars, Sterling, Euro and UAE Dirham in an effort to stabilize the local currency, Rupee. The central bank had also arrested some of the money changers to stabilise exchange rate in the country. In a surprise move, the SBP in January 2011 had lifted ban on the export of cash in Pound Sterling, Euro and UAE Dirhams by exchange companies. Under Para 3 of F. E. Circular No. 4 dated May 09, 2008, the exchange companies were disallowed to export cash other than US currency. According to the circular, the Exchange Companies will, however, ensure to receive the equivalent US dollars against exported currencies in their foreign currency accounts maintained with banks in Pakistan within 3 working days, The role and consequences of capital controls continue to be a subject of controversy for many developing countries. However, in case of Pakistan, foreign investors do not face any restrictions on the inflow of capital, and investment of up to 100 per cent of equity participation is allowed in most sectors. Unlimited remittance of profits, dividends, service fees or capital is now the rule, a World Bank report said. The Economic Survey Pakistan stated that market friendly measures introduced in the early 1990 such as privatization of various state owned enterprises/units and commercial banks, allowing private sector to set up commercial and investment banks, and permission to foreign investors to buy and sell shares freely on the stock market with full repatriation facilities and permission to own up to 100 per cent equity in a venture, served as catalyst in reviving the confidence in the countrys stock market. The economy was subjected to enormous direct and indirect costs of war on terror which continued to rise from $ 2.669 billion in 2001-02 to $ 13.6 billion by 2009-10 and given the current trend it seem that the losses caused by war on terror to Pak economy would increase further in times to come, the survey mentioned. Pakistans investment-to-GDP ratio has nosedived from 22.5 per cent in 2006-07 to 13.4 per cent in 2010-11 with serious consequences for job creating ability of the economy. A leading industrialist said that some local exporters and industrialists have shifted their industrial units from Pakistan to Bangladesh and China due to numerous tax incentives and better opportunities of market access across different regions. Some export-led value added industries, either related to textile or non-textile sector, are being relocated to Bangladesh and China. Pakistani industrialists are manufacturing their products in those countries and exporting to Pakistan. Sometimes they show their corporate presence here but their production set-up has been transferred to Bangladesh and China, he said. This trend has been on the rise owing to countrys negative perception among international investors and buyers, he added. In view of the long range of issues facing exporters like continued severity of the domestic energy crisis, increased cost of doing business political uncertainty in the country and law and order issues triggered manufacturers to move from Pakistan to other countries.