Cash flight

It would be an outlandish claim, were it not being made by State Bank of Pakistan (SBP) Governor Yaseen Anwar. A staggering $9 billion is smuggled out of the country, every year, in cash. That amount equals just over four per cent of the total size of the economy. Yet, what is even more disturbing than the number is what it represents. Money moving in and out of a country is unto itself not a bad thing. In the normal course of commerce and investment, it is inevitable that large sums of money will move in both directions. What is troubling about this phenomenon is that the amounts moving out of the country are doing so in physical cash, meaning that it is being done in a form that would evade documentation, raising questions about who wants to move the money, why they want to move it and where they got it in the first place.



There is also some perspective in order. The $9 billion figure is high, but it is about a third lower than the total amount of remittances sent by overseas Pakistanis every year. The governor also did not make it clear as to whether the number was a rough estimate or the result of a more thorough analysis by the central bank. Nevertheless, it is problematic, particularly when one juxtaposes this widespread smuggling of cash against another fact: Pakistan has the highest use of cash as a percentage of total money supply in the world. Simply put, Pakistanis appear to be disproportionately more likely to use cash than any other nation on the planet. This is not just a statistical quirk. It means that we like to conduct transactions without documenting them at all and hence use the one medium of exchange that requires no written records. And that, in turn, means that the task of trying to document the economy — both for purposes of taxation and for cracking down on illegal activities — is virtually impossible.

Fortunately, the SBP — still staffed by remarkably intelligent public servants — has dealt with a similar challenge before and won. We refer, of course, to the highly successful campaign against undocumented remittances into the country, where the central bank was able to put unlicensed money transfer agents out of business by simplifying regulations for documented transactions and beating the hundi merchants on price. It seems to us that the problem of large sums of cash moving out of the country may involve somewhat similar solutions. For one thing, the current rules for moving money out of the country are somewhat archaic. There is a limit on how much money can be converted into a foreign currency and each transaction has to be done using physical cash. Rupee accounts have severe restrictions on being used in transactions involving foreign counterparties. And the documentation requirements for people moving money out of the country appear to be quite onerous. In short, at least part of the reason why so much cash is being smuggled out of the country is because bureaucracy makes it difficult to do so legally.

But we acknowledge that the red tape is only part of the problem. Another problem is that the wealthiest Pakistanis simply do not trust the government enough to keep their money within the country. This is an admittedly more difficult challenge to tackle, since it involves building long-term trust with wealthy citizens while also remaining committed to ensuring that they pay their fair share in taxes. We do not pretend there are any easy solutions to this, but there are some good places the government can start. For instance, it might want to try incentivising documentation by not overtaxing documented sectors of the economy. And it should introduce credible constraints to ensure that confiscatory disasters like the 1970s nationalisation campaign are never repeated. There will be those inevitable hand-wringers who say that law enforcement at airports should be stepped up. We agree, but that would only be dealing with the symptoms. For longer-term success, the government should tackle the disease.

Published in The Express Tribune, October 4^th, 2013.

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