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Pakistan’s foreign exchange earnings

If one is to extend appreciation to any one (individual or group of people) for saving the Pakistani economy from complete collapse it is not our finance ministers from Dar to Shaukat Aziz to Dar again or to any political party, though the scales of destructive policies have varied from government to government, but to our emigrant workers and exporters.

Remittance income through legal channels helps pay for essential imports and reduce the pressure on our balance of payment position. Exporters are more molly coddled as a valuable source of foreign exchange but over time have contributed to leakages within the system through over-invoicing and abuse of incentives notably the tax refund scheme which may not necessarily be through complicity of an exporter. In 2012-13, total exports were estimated at around 24.7 billion dollars while the comparable figure for the previous year 2011-12 was 24.6 billion dollars. Remittance income for 2011-12 was 13.1 billion dollars while for 2012-13 the amount was 13.9 billion dollars. In short, remittance income has become around 55 percent of total exports. So what are the incentives that are extended to exporters as well as those who remit money?

Successive governments have provided considerable incentives to exporters as they fuel the domestic economy through a contribution to national income, in providing employment and also provide support to the domestic currency through strengthening the balance of payment position. The list of incentives is exhaustive and includes: (i) State Bank of Pakistan (SBP) sponsored Credit Incentive Scheme (CSI) which provides short-term working capital for 180 days to increase exports with (a) transaction-based scheme coverage to the extent of 100 percent of the export order/LC contract, available at pre- and post-shipment stage, to indirect exporters at pre-shipment stage only, and performance required against every transaction, and (b) performance-based which is available to direct exporters only who are allowed a revolving cash credit limit equivalent to 50 percent of the total value of their goods exported the previous year, and performance is determined on the basis of export of eligible items made the previous year with the mark-up rate last year being 7.5 percent plus one percent spread of banks; (ii) long-term financing to be provided to export-oriented industry (new as well as existing), and mark-up rate 6 percent for three years and 7 percent for over three years to 7.6 percent; and (iii) tax incentives include income tax 0.75 percent of export proceeds, export development cess 0.25 percent, customs duties DTRE and sales tax zero-rated.

However, many exporters are tempted to engage in under-invoicing, especially with a fast eroding rupee value, which perhaps partly explains why total exports remain low while accounts held by Pakistanis in Swiss accounts have reached 100 billion dollars. In addition, there is much abuse of export refund scheme at a considerable cost to the national treasury. There are other issues with specific exports notably the textile sector, the largest export earner for the country, where issues erupt within its sub-sectors which require government intervention necessitating a dedicated federal ministry with its own costs. There is a need for the government to focus on proactively investigating those engaged in under-invoicing, which would require dedicated forensic experts, and allow an established industry like the textile industry, to operate within a free market system both domestically and internationally. Incentives and interventions must be focused on units engaged in new non-traditional exports.

Pakistan Remittance Initiative (PRI) was launched in 2009 by the SBP and its success can be gauged by the rise in remittance income from 6.4 billion dollars in 2008 to 12 billion dollars in 2011 through legal channels. So what incentives were extended to expatriates that led to higher inflows through the legal channels? The SBP initially allowed five banks (MCB, ABL, HBL, NBP and UBL) to transfer and settle interbank transactions into beneficiaries’ accounts on the same day and thenceforth to undertake liquidity management for reserve requirement and cash management at key geographical ATM and branch levels to accommodate the anticipated increased volume and ensure smooth delivery of remittances to the beneficiaries/account holders. SBP also provided the facility to securely exchange data pertaining to interbank transactions online and launched a performance-based scheme whereby the government reimbursed marketing expenses of an overseas entity to the tune of 0.5 percent on incremental income above 100 to 400 million dollars from a particular jurisdiction, 0.75 percent for 400 to 800 million dollars and one percent on remittance above 800 million dollars.

The Pakistan government also introduced a foreign exchange remittance card which allows the following benefits: (i) special handling at arrival and departure at airports. However, the existing set-up is so mismanaged with no enforcement of forming orderly lines that it remains an ordeal clear immigration and customs, (ii) free issuance and renewal of passport but only for one year after issuance of the card, (iii) duty card will be issued and its points would depend on the amount remitted per year and would be like a frequent flyer points namely allow the holder to purchase from duty free shops and get special handling. The Pakistan Ambassador to the UAE stated this month that “those who remitted more than $15,000 last year can submit the receipts of remittances to the embassy and they will be given the appreciation certificates. We don’t depend on any other official verification in this regard.” When asked why some overseas Pakistanis continued to use illegal channels to remit money he explained “Most of the Pakistani expatriates are uneducated blue collar workers. They have a misconception that if they remit money through legal channels, they have to pay some sort of tax to the Pakistani government. There is no such law. Moreover, it is free of charge to remit money to Pakistan through banks or exchange centres. There is no charge at all.”

However, Transparency International Pakistan (TIP) raised some serious allegations of fraud by banks with Governor SBP Yasin Anwar. The TIP’s letter alleges that it has received a very serious complaint on the misuse of Pakistan Remittance Initiative and estimated loss to exchequer of 6.67% by alleged collusive practice of banks and SBP. TIP has requested the Governor to kindly examine the allegations made by the complainant, and if found correct, take immediate remedial measures without any further loss of time. One would hope that this concern has been appropriately dealt with.

Exports and remittance income through legal channels must rise further if the pressure on the balance of payment position is to ease and thereby strengthen the rupee. Work has been done in this regard by former governments but the PML-N needs to begin to plug leakages before launching their own schemes designed to raise exports and encourage remittance through the legal channels.

Anjum Ibrahim, "Pakistan’s foreign exchange earnings," Business recorder. 2013-10-21.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Economic development , Economic planning , Foreign exchange , Economic-Pakistan , Finance , Banks , Banking , Taxation , Pakistan , SBP