FORGETTING the bad memories of 2008 when Pakistanis lost billions in overseas investments in real estate, the super rich again invested over $4bn in purchasing flats and villas in Dubai during 2013 and 2014.

This amount is almost equal to the amount Pakistan received from the IMF during the same period after accepting condationalty that adversely affected the life of the common man. Prior to this, one heard news that Pakistanis have over $200bn in overseas banks.

This raises some basic questions in the minds of the common citizens. Is foreign exchange easily available to every person in any quantity? Are there no restrictions on sending any amount of hard earned foreign exchange abroad? What will happen if everyone gets their local rupee account converted into dollars? For an exact answer, one needs to see the history of foreign exchange controls in Pakistan.

It is ironic that overseas Pakistanis send billions of dollars to their homeland every year, while the elite invest their greenbacks abroad in questionable deals

Up to 1973, there were strict controls on the possession of foreign exchange or on the opening of foreign currency accounts by resident and non-resident Pakistanis. Foreign currency accounts (FCAs) were introduced in 1973 for an increasing number of Pakistanis working abroad to provide them a reliable, attractive and safe savings instrument at home.

Under the Payment System Reforms in 1991, the capital account and the exchange rate regime was substantially liberalised by removing all controls on possession of foreign exchange. Resident Pakistanis were allowed to open FCAs in four leading currencies, which made the Pakistani rupee convertible into these currencies.

Later on, exchange companies were established to carry out sale/purchase, export/import and remittance activities involving foreign currencies. In simple words, there is currently neither any restriction on converting rupee cash balances into foreign currency, nor any limit on the transfer of balances from FCAs abroad.

The main objective behind capital account liberalisation and rupee convertibility in the early 1990s was the integration of the national economy with global finance in terms of trade and capital flows. This policy initiative improved the country’s access to private capital flows in the initial period, but later on proved quite problematic on a number of accounts.

Owing to domestic security and economic and political concerns, capital inflows have largely reduced now. A huge amount of foreign exchange is being sent/invested abroad since there is no restriction on the inflow or outflow of foreign exchange.

According to press statements by a former SBP governor, about $25m are being sent out from the country on a daily basis. On the domestic front, a great deal of speculation takes place in the forex market, which exerts undue pressure on the supply and demand of foreign exchange in the market.

Because of the current appreciation of the dollar in terms of other leading currencies, the process of dollarisation of the economy, already in place, may catch speed. Presently, the beneficiaries of the game of foreign exchange (both internal and external) are people of big means in private and government sectors.

What will happen with the local currency if everybody with some means joins a line before any exchange company for converting rupee cash balances into dollars or any leading foreign currency? This will not be against the existing law on foreign exchange, but it is a better choice for safeguarding one’s hard-earned savings.

Along with the advantages of capital account liberalisation, empirical evidence suggests that it makes economies more vulnerable to international financial crises, especially those in the developing world. The common danger lies in free capital flows due to abrupt exit of foreign capital, as experienced by Mexico in 1994 and by the East Asian Tiger economies in 1997.

However, concerns in Pakistan’s case on this account are less external and more internal. It is not likely to receive massive foreign capital inflows during the current political and security situation despite the capital account liberalisation and rupee convertibility. Meanwhile, the danger of a flight of capital looms large in an economy marked by economic and political ills.

It is ironic that overseas Pakistanis send billions of dollars to their homeland every year, while the elite invest their greenbacks abroad in questionable deals. Pakistan cannot afford to go back to the controlled foreign exchange regime of the 1960s and 1970s in the global environment of the 21st century.

However, the free outflow of hard-earned foreign exchange has to be stopped. Otherwise, it would add further to the vulnerability of our economy to internal and external shocks.

The writer is President of the Institute of Banking and Business Learning. munir1951@hotmail.com

Published in Dawn, Economic & Business, March 16th, 2015

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