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| Thursday November 13, 2008 |
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Forex raid just the start Syed Fazl-e-Haider The government, battling to rescue a tumbling rupee while seeking to raise billions of dollars to stave off a debt default, last week raided the country's top currency exchange company and arrested its senior executives in an attempt to staunch a hemorrhage of dollars out of the country through illegal transactions. More arrests may follow, possibly including senior politicians and businessmen, according to the government. About US$10 billion has reportedly been transferred in the past year through the two most popular channels of illegal transfer of foreign currency, known as the hawala and hundi systems. The Ministry of the Interior said about 40 billion rupees (US$500 million) had been shifted from Pakistan in just the past one month. The dollar smuggling has helped drive rapid depletion in the country's foreign exchange reserves, which have shrunk to $6.76 billion from over $16.5 billion in October last year, in turn causing a loss of confidence in the stock market. The movement into dollars for smuggling has also helped to erode the value of the rupee, which has lost about 31% against the US dollar this year. Friday's raid by the Federal Investigation Agency (FIA) on the offices of Khanani & Kalia International (Pvt) Ltd (KKI), the country's largest exchange company, was combined with the arrest of chief executive Munaf Kalia and his partner Javed Khanani, along with three other foreign exchange dealers. The KKI head office in Karachi has been sealed off and the computer data and other evidence seized to help investigations into whether the arrested men were involved in money laundering. The central bank on Monday suspended KKI's licence for 30 days with immediate effect for violation of rules and regulations. FIA team also raided a KKI office in Islamabad, and took into custody records which they said showed illegal transfers of up to 36.86 billion rupees (US$460 million). Nearly 1,000 lost and fake identity cards have also been seized from officials of the Pakistan Post and the National Database Registration Authority (NADRA). The ID cards were allegedly used to obtain bank loans and for credit card and property fraud. Further raids and arrests are expected, with the FIA acting in cooperation with the central bank, reports said. FIA is keeping confidential the information gathered from Kalia and Khanani, who are being interrogated for information and names of politicians, bureaucrats and businessmen involved in the alleged laundering of funds and currency smuggling. "The investigation agencies are trying to extract information from the accused as to how bureaucrats, politicians, businessmen and other influential people transferred money to their children for education and as installments for expensive properties abroad," Online news agency reported. Javed has disclosed the names of some very influential people whose money he had sent abroad, the Daily News reported, citing FIA director-general Tariq Pervaiz. The government has vowed to bring people involved in the illegal transfer of dollars to book, irrespective of their influence. "If any political bigwigs were found involved in the scandal, they will also be punished in line with the law," said Shaukat Tarin, financial adviser to the prime minister. The arrests come as Pakistan reluctantly turns to the International Monetary Fund (IMF) for a US$9 billion loan, Dawn News channel reported, citing unidentified Finance Ministry officials. Further funding is also being sought from the group known as Friends of Pakistan, which includes the US, Britain, China and Saudi Arabia. The government, which is urgently in need of funds to pay $3 billion in debt servicing costs due in the coming year, has sought to avoid IMF funds on concern over terms that would come with any loan. Prime Minister Asif Ali Zardari came back empty-handed after earlier approaches to China. The IMF says Pakistan needs $10 billion to avoid defaulting on its debt. IMF-imposed terms could include higher interest rates and reduction of subsidies, hurting businesses and other sectors of the economy. Economic adviser Tarin said on Friday that Pakistan would make a decision on seeking financial help from the IMF after November 10, raising speculation that the exchange crackdown was related to the IMF deal. Following the KKI arrests on Friday, money changers in Peshawar had gone underground, according to newspaper reports. The city serves as a vital gateway to Afghanistan, including for transfers of cash between the two countries without involving banks. About 400 currency dealers operate in Peshawar, primarily in the markets of Andar Shehr and Chowk Yadgar. Only about 32 are registered, while about 700 Afghans are reportedly involved in the illegal hundi and hawala transfer systems. Future action by the FIA will be aimed at countering various methods used for the flight of foreign currency, including under- and over-invoicing by exporters and importers, according to media reports. Officials believe the crackdown could have a positive impact on the weakening rupee against the US dollar in the open market. The rupee traded firmer at 80.65/75 to the dollar in the interbank market on Monday compared with Saturday's closing of 81.00/10. The currency's plunge of 31% this year has driven up import costs and helped to fuel inflation, which in October rose to 25%, close to a 30-year high. The nation's foreign reserves have meanwhile shrunk to $3.7 billion from $14.2 billion a year ago, and Pakistan's credit rating was lowered last month on concern the nation won't be able to pay its overseas debt because of the decline in foreign reserves. As the central bank's reserves are not enough to sell in the market, only a big inflow of foreign exchange can strengthen the rupee or at least save it from further weakening. The erosion in the value of the local currency has also sent distress signals to investors in the local stock market, with portfolio investment plunging 24% in July and August from a year earlier to $110.9 million from $146.5 million. The central bank in May, seeking to stabilise the rupee, stopped exchange companies from sending cash abroad in dollars, pounds sterling, euros and United Arab Emirate dirham. The central bank had already warned money changers to refrain from illegal transfers and the Interior Ministry set up a FIA cell to deal with the issue. The Forex Association of Pakistan (FAP), which collects $7 billion in foreign exchange annually, has warned that if the FIA harassed money changers they would close their businesses, depriving the country of remittances from Pakistanis working abroad. In 1998, the government of prime minister Nawaz Sharif initiated a similar crackdown, which was stopped on the request of the FAP. The latest crackdown involved illegal transactions and would have "no negative consequences" on remittances by expatriates, Dawn quoted a government official as saying. Some analysts questioned the central bank's capacity to regulate and monitor foreign exchange companies, asking why the bank's analysts and auditors could not detect any faults in the transactions of companies such as KKI, which must keep the central bank informed of all transactions. KKI, a joint venture of business groups Khanani and Kalia, was the country's first exchange company after the central bank, seeking to improve documentation in the economy, in 2003 converted money changers into exchange companies. Since its transition as an exchange company, KKI evolved as a leader in the diversified currency exchange business with a wide variety of customer services. It is the only ISO 9001:2000 certified (Quality Management System) exchange company in the country. Syed Fazl-e-Haider is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004. |