Protection of Economic Reforms Act: Change in law to bring down demand for US dollar

It will also help ease pressure on current account, reduce trade deficit

KARACHI: Experts have welcomed an amendment to the Protection of Economic Reforms Act 1992 that will bar those who do not file tax returns from operating bank accounts in foreign currencies and making international financial transactions in such currencies.

The amendment is strongly believed to reduce the mounting pressure on the country’s foreign exchange reserves, which have shrunk 27.88% to $17.64 billion as on April 6, 2018 from the historic high of $24.46 billion as on October 14, 2016, according to the State Bank of Pakistan (SBP).

The change in the law will also ease pressure on the widening current account deficit - the toughest challenge for the past two years, reduce trade deficit and slash the speculative demand for dollars and other international currencies in the open market.

The amendment, however, will not slow down the inflow of worker remittances as non-filers of tax returns can send money, which will be converted into Pakistani rupees, to their relatives back home.

On the flip side, the amendment may bring down the foreign currency reserves of commercial banks that went up 25.76%, or $1.27 billion, to $6.20 billion at the outset of April 2018 from $4.93 billion in December 2016.

The SBP has announced the amendment by including a paragraph in the Act that says “foreign currency accounts can be fed by remittances received from abroad, travellers’ cheques issued outside Pakistan (whether in the name of the accountholder or in the name of any other person) and foreign exchange generated by the encashment of securities issued by the government of Pakistan. A foreign currency account of a citizen of Pakistan resident in Pakistan can also be fed with cash foreign currency only if the accountholder is a filer as defined in the Income Tax Ordinance 2001.”

“This is a positive step,” said The Institute of Bankers Pakistan Chief Executive Hussain Lawai.

“The amendment will stop unnecessary outward international remittances… and prevent the conversion of black money into ‘white’ through the misuse of foreign exchange,” he said.

He explained that non-filers of tax returns would not be able to operate foreign currency accounts after June 30, 2018. “They could neither receive international remittances nor could they send. They will be able to only withdraw the previously deposited dollars…Technically speaking, their accounts will be frozen,” he said.

According to Lawai, the amendment will ultimately reduce the demand for dollars in the open currency market, which will become stable. The change would also encourage people to become tax return filers, he said.

Tax expert SM Shabbar Zaidi said the other day authorities had deliberately designed laws in the past that allowed the misuse of foreign currency inside and outside the country.

The misuse, according to Zaidi, has led to serious consequences and may drag the country into the terror financing watch list of the Financial Action Task Force (FATF) in June. Moreover, it has given birth to issues like Panama Papers leaks that led to the disqualification of former premier Nawaz Sharif.

Zaidi pointed out that earlier no authority including the SBP had the right to question individuals about the source of income parked in foreign currency accounts and the use of currency under Section 111(4) of the Income Tax Ordinance, 2001.

Foreign currency expert Naeemuddin said earlier anyone holding the Pakistani national identity card could operate a foreign currency account and receive and dispatch dollars across the world without giving any reason. “Now, only tax return filers can do this.”

The then government of Prime Minister Nawaz Sharif had introduced the dubious law (through amendments in the Foreign Currency Act) in 1992-93 to give a free hand for legalising the black money.

It took the authorities about a decade to correct Pakistan’s direction in the international financial system, he said.

Forex Association of Pakistan President Malik Bostan commented “the amendment is silent over the existing foreign currency accounts. The amendment deals with the opening of new foreign currency accounts.”