Same old mistakes

The administration’s current policies will likely accelerate the pace at which foreign currency leaves the country.

It seems that bad ideas never truly die in Islamabad. There is a notion among both politicians and bureaucrats that the economy can simply be forced by fiat to behave the way the government wants it to. The latest example of this mode of thinking is the government’s decision to arbitrarily restrict the amount of cash that Pakistanis are allowed to travel with abroad, reducing the amount allowed from $10,000 to $5,000, as if such a manoeuvre will somehow magically end the flight of capital from the country.

The Nawaz Administration is headed towards making exactly the same mistake it made in 1998 when it made the disastrous decision to freeze all foreign currency accounts in Pakistan. Instead of trying to understand what motivates people to move their money abroad, the government is simply trying to force them not to do so. It is the same old broken Islamabad strategy: treat the symptom, ignore the disease. And in this case, it is not even treating the right symptom. In case the government has not noticed, private individuals with foreign currency accounts in Pakistan have largely kept their money within the country, as evidenced by the stable foreign exchange reserves at private banks. The problem of falling reserves is mostly on the government side. So, it is unclear which problem the government is trying to solve.

Unfortunately for the administration, the economy is far too complex a beast to be controlled with crude mechanisms such as these. Carrying physical cash is an enormously inefficient mechanism of moving money abroad and Pakistan’s wealthiest citizens have far more sophisticated ways of moving money around.

There is only one way to build up the country’s foreign exchange reserves in a sustainable manner: build up the confidence of investors that their money is safe in Pakistan and free from government interference or even seizure. The administration’s current policies will only scare more people away, and will likely accelerate the pace at which foreign currency leaves the country.

Published in The Express Tribune, January 14^th, 2014.

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