Pakistan has stopped foreign exchange dealers taking money out of the country as it teeters on the verge of bankruptcy.
By Isambard Wilkinson in Islamabad
The government, led by the Pakistan People's Party, has taken the controversial step in order to restore international confidence in its economic policies amid ongoing talks with the International Monetary Fund (IMF).
Pakistan instigated a crackdown on foreign currency flight by suspending the licenses of a prominent foreign exchange company earlier this week.
Authorities say the flood of money out of the country has caused an enormous drop in the value of the rupee.
In May, the State Bank of Pakistan changed the law to stop exchange companies from sending cash abroad in dollars, sterling, euro, and United Arab Emirate dirham in an effort to stabilise the rupee.
They have now begun enforcing the new rules with the first licences being suspended.
Police said at the weekend that investigators had arrested four foreign currency dealers on suspicion of illegally sending money abroad.
Newspapers have reported $10 billion had been illegally transferred out of the country in one year.
The unusual measures were intended to send a message to international donors and local businesses that Pakistan is serious about tightening the regulation of its economy ahead of a forum of multilateral lenders who are meeting in Abu Dhabi next week.
Pakistan needs a rapid injection of $4bn in order to prevent it defaulting on debts by the end of the month.
The country is facing a balance-of-payments crisis and has been in talks.
Officials say they hope to avoid having to go to the IMF for money and are trying to secure help from allies in Abu Dhabi.
Inflation is running at 25 per cent. High oil prices and dwindling overseas investment have left Pakistan with fast-depleting foreign reserves, pushing it towards a default on its sovereign debt.
The country is hamstrung by a poor energy infrastructure that has led to electricity blackouts of up to 12 hours each day in parts of the country which has hit industry hard and led to the closure of important textile companies.
Among the four were two of the top officials of the Khanani and Kalia International company, one of Pakistan's most prominent currency exchange companies, according to police officials.
Officials say that the activities of Munaf Kalia and Javed Khanani - arrested in Karachi and Lahore respectively - may have contributed to a big reduction of the country's foreign exchange reserves, which have depleted from over $16bn in October 2007 to below $7bn today.
At the beginning of the year it was trading at 65 to the dollar. Last month it fell to a record low of 90 to the dollar.
The state bank governor, Shamshad Akhtar, said parliament may strengthen legislation to curb illegal foreign-exchange transfers.
"The new legislation will fix monetary penalties" for companies that violate the central bank regulations, said Ms Akhtar. "Our job is to monitor and watch the exchange companies."
Pakistan's central bank increased its benchmark interest rate for the fourth time this year yesterday to 15 per cent from 13 per cent.
"The State Bank remains committed to price stability so we have to introduce steeper monetary tightening to tame demand pressures," said the governor. "We need to avert the depletion of our foreign reserves."
Talks with IMF at final stage: Tareen
By Mehtab Haider
ISLAMABAD: Adviser on Finance Shaukat Tareen said on Wednesday that the government would get the cabinet's approval by next week for formally approaching the IMF for a bailout package, and an institutional mechanism under the supervision of the planning commission would be placed to monitor the economic stabilisation action plan on quarterly basis.
"We are holding last minute discussions with the IMF and a home-grown stabilisation programme will be placed before them after getting approval from the federal cabinet by the next week," Shaukat Tareen said, while talking to The News here on Wednesday.
He said the action plan would be ready by December in consultation with the stakeholders concerned and implementation on it would be started from January 2009. Answering a query regarding preparation of the economic stabilisation programme, the adviser claimed that the economic advisory council in consultation with Minister of State for Economic Affairs Hina Rabbani Khar, Planning Commission Deputy Chairman Salman Faruqui and the finance ministry high-ups devised the programme on the basis of which they were discussing the bailout package with the IMF.
But insiders say a former IMF official prepared the draft of the economic stabilisation programme on the basis of which the package is being sought from the IMF. Tareen further said the government would devise an effective strategy to implement its home-grown agenda and the action plan would be ready by December 2009. "We will start implanting it from January 2009," he added.
He said the Friends of Pakistan would meet on Nov 17 in which ways and means would be devised to help Islamabad. The initial draft of the economic stabilisation programme was prepared by Ehtesham Ahmed, who is now currently serving as consultant in the ministry. But later on input was also sought from the high-ups of the finance ministry before finalising the document on the basis of which we discussed economic stabilisation programme with the IMF in Dubai, a senior official in the finance ministry confirmed while talking to The News.
Ehtesham Ahmed is a renowned economist, who had left the IMF recently and the Pakistani authorities hired his services as consultant in the finance ministry. He came to Pakistan for a few days and works for the finance ministry in order to pursue Pakistan's case before the multilateral lenders as he possessed in-depth knowledge about the procedural requirement of getting loans on favourable conditions from the multilateral creditors.
The nine-point agenda, which will be approved by the cabinet in next couple of days, will set the path for negotiating a bailout package with the IMF. According to the official document seen by this correspondent, the nine-point agenda comprised (1) stabilisation of key economic indicators, (2) focusing on agriculture (3) taking steps to ensure manufacturing sector for facing global competition, (4) human resource development (5) overcome energy shortages (6) public-private partnership (7) improving banking and capital markets (8) civil service reforms (9) targeted subsidy such as Benazir Income Support Programme for taking care of vulnerable segments of the society.
"The old wine in new bottles," said one of the officials who termed the nine-point agenda as nothing new giving out a box solution to economic woes. One of the officials said the economic managers are getting expensive loan facility on interest rates in the range of 6 per cent when there is cheap facility available for Pakistan in the shape of Poverty Reduction and Growth Facility (PRGF).
"But there is nothing new in this nine-point agenda," sources said and pointed out that the panel of economists headed by Dr Hafiz A Pasha also diagnosed same prescription for the ailing economy of Pakistan which the IMF is suggesting us to achieve economic stabilisation on short-term period in terms of allowing exchange rate depreciation, cutting down fiscal deficit and increasing discount rates in months ahead.
Pakistan will have to pay interest payment on its external debt and liabilities in the range of over $3 billion ($1 billion in the shape of principle amount and $2 billion as interest payment) during the current fiscal year. The major payment worth $500 million will be due by February 2009 on Eurobond, said the official.
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