By incident on approach to Askari Bank Malir Cantt, I came to know that non-filers are not allowed to open foreign currency accounts.
It is agreed that efforts are required to clean up untaxed money from the banking system but this was not the right way as it would hurt the much-needed forex inflows in the country.
It was April 2018 and PML N was in rule, when the State Bank of Pakistan (SBP) took a decision to tighten noose around non-filers in line with the Protection of Economic Reforms (Amendment) Ordinance 2018. A foreign currency account of a citizen of Pakistan resident in Pakistan can be fed with cash foreign currency if the accountholder is a filer as defined in Income Tax Ordinance 2001. Foreign currency accounts can be fed by remittances received from abroad, travelers cheques issued outside Pakistan (whether in the name of accountholder or in the name of any other person) and foreign exchange generated by encashment of securities issued by the government of Pakistan or buying of foreign Currency from the open market.
The argument of the government was that it wants to document the economy and extend the tax net through the measure and to comply with the standards of anti-money laundering (AML) and combating of the terror financing (CFT). Global financial system watchdog Financial Action Task Force (FATF) has already placed Pakistan on its grey list for the deficiencies of the country in compliance with the standards of AML / CFT.
But what to say that it is altogether negative for the country where majority of the people are non-filers and mostly people have no capacity to approach corrupt FBR with highly complex system to become filer. Number of filers stand at one to two million as against the official estimate of tax filers of seven million. There is a need to bring foreign currency inflows into the banking system the only documented sector of the FX Market. We cannot say that this was the only reason why PKR has now touched Rs 143 per US Dollar moving from Rs 121 per US $ in Sept 2018 and Pakistan external debt has crossed $ 100 billion level but such steps bring always negative results when around $ 10 billion travel outside through smuggling yearly and daily on Air Ports “Khappias” are travelling outside the country with suitcases full of foreign Exchange.
In fact by taking such cosmetic steps government and SBP both have encouraged KERB market to make billions of profit through ongoing depreciation of PKR
The amendments introduced through the Finance Bill 2018 to two landmark pieces of law dealing with foreign currency accounts have put stronger barriers on free transfers of funds into and out of these very accounts that was not the objective of allowing Foreign Currency accounts in early 90’s.
And in fact they have shut the doors on feeding of these accounts through foreign exchange purchased from the open currency market. In the past, the no-question-asked status of foreign currency accounts and ability of influential people to buy foreign exchange freely from the open currency market and put them in their accounts has resulted in substantial capital uplift.
Pakistan’s economy and its taxation system cannot be properly analyzed unless there is proper understanding of Pakistan’s foreign exchange regime. In Pakistan, unlike almost all the countries, fiscal policy concessions and protection have been directly related to foreign exchange regime.
The original and substantive law relating to movement of foreign exchange in Pakistan is the Foreign Exchange Regulations Act, 1947. [FERA]. It is another unique feature, though not desirable that a parallel legislation, operates by way of Protection of Economic Reform Act, 1992 (PERA) since 1992. Then there is another law termed as the Foreign Currency Accounts (Protection) Ordinance, 2001. This regime cannot be properly understood unless all three primary regulations are read together.
In the Finance Act 2018 certain fundamental and substantial changes have been made in PERA that have changed the whole scenario of the FCY Accounts.
In 1990, the Government of Pakistan announced economic reforms which have been defined in the PERA. These measures were announced on November 7, 1990. There were various measures which were taken under these reforms; however, in relation to FCY Accounts State Bank of Pakistan issued Circular dated February 12, 1991 that allowed residing in Pakistan to open foreign currency accounts in Pakistan. This was in continuation to Foreign Currency Accounts regime as contained in Chapter V of the Foreign Exchange Manual issued under the FERA. It was further provided in that circular that there will be no ‘enquiry’ about the ‘sources of funding’ such accounts. This relaxation was the time and action where foreign exchange policy was mixed with fiscal measures and authority. In author’s view this has been undone by the amendments in the PERA in 2018. The approach is inadequate and unreasonable; hence it needs to be corrected in the Coming Federal Budget for FY 2020.