ISLAMABAD: Dubbed by economists a “ludicrous idea”, Finance Minister Ishaq Dar has suggested Prime Minister Nawaz Sharif to freeze all foreign currency accounts in Pakistan.
Well-placed sources told Daily Times that the finance minister took up the matter with the prime minister just a day before his departure to the United States. However, the premier asked the finance minister to discuss the proposal with him upon his return.
Sources said the Finance Ministry has prepared a plan to execute the proposal, in case approved.
Primarily, the idea is to immediately check capital flight through those accounts. Currently, foreign currency account holders can transfer an unlimited amount from Pakistan.
The private citizens own more than $700 million in the foreign currency accounts, in Pakistan, at the moment. It is a general practice by the governments to include that amount in the country’s overall foreign reserves. Sources said this freezing might be temporary, until some proper regulations were in place to check this capital flight. The finance minister has reportedly proposed that an executive order could be issued to freeze the accounts, to be endorsed by parliament later.
According to law, in order to establish a business abroad, every Pakistani citizen needed prior permission from the State Bank of Pakistan (SBP) if the amount remitted was up to $5 million. For the amount exceeding that limit, permission was required from the Economic Coordination Committee (ECC).
It is worth mentioning here that on August 18, 1992, the government of Nawaz Sharif passed the Protection of Economic Reforms Act, 1992 that superseded all past laws and allowed “freedom to bring, hold, sell and take out foreign currency”.
“All citizens of Pakistan, resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall anyone be questioned in regard to the same.
The Act exempted all citizens of Pakistan who hold foreign currency accounts in Pakistan from any inquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts.
It also restricted the State Bank of Pakistan or other banks to impose any restrictions on deposits in and withdrawals from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith.
Ishaq Dar had informed the media after attending the federal cabinet’s meeting on August 31 that the government was considering a legislation to bring foreign currency accounts under the orbit of law, as account holders were sending an unlimited amount to other countries and it was essential that the government knew about transactions made to other counties.
Official of the State Bank of Pakistan (SBP) informed the National Assembly’s Finance Committee that Pakistani nationals had transferred more than Rs 800 billion to foreign countries during the last five years through foreign currency accounts, and the bank did not know for what purpose the money had been sent abroad. Moreover, $601 million were sent abroad with the permission of the ECC in the last three years, official had informed the committee.
Sources said despite tall claims by the government officials, the country debt ratio would equalize the country’s GDP in next couple of years. And, in case, Pakistan fails to pay or reschedule loan repayments the threats of sovereign default would emerge.
In that situation, the international lending institutions normally offer bailout packages, on the conditions which massively hurt the common people.
It may be mentioned here that foreign currency accounts had last been frozen in 1998 after Pakistan conducted nuclear tests. The aim was to secure the country from a “sovereign default” owing to the looming economic sanctions, which were slapped by world powers. All foreign currency accounts, with a few exceptions, had then been frozen, inviting massive criticism from all over the world. A number of foreign banks – then operating in Pakistan – had shut their businesses down, which provided an opportunity to local banks to expand their operations.
Some of the other adverse effects of the freezing of accounts were: massive reduction in the country’s foreign reserves, huge discouragement to foreign investors, and a massive increase in foreign debts. The prime minister is expected to discuss the matter in detail during the next week, sources said.
When contacted, Finance Ministry spokesperson Dr Shujaat refused to comment on the proposal to freeze foreign currency accounts, saying the matter was related to the SBP, so the central bank’s officials could better comment on it.
The SBP spokesperson Dr Qamar expressed his ignorance on the matter saying he had no knowledge of the government’s plans, if any, to freeze foreign currency accounts in Pakistan.