Import payments deferment scheme promotes hawala business: analysts

KARACHI: The import payments deferment scheme hurts the economy by promoting hawala business, weakening the rupee, and disrupting flow of remittances through legal channels, analysts and currency dealers said on Thursday.

In December 2022, the State Bank of Pakistan (SBP) lifted restrictions requiring banks to obtain prior authorisation before beginning import transactions of necessities like food, pharmaceuticals, energy, and raw materials to facilitate business operations amid a dollar shortage.

Additionally, it allowed importers to import on a deferred payment basis beyond 365 days from the shipment date. The central also announced self-funded imports. Imports financed by the foreign currency that the importers had access to through equity, project loans, or import loans from overseas were permitted under the facility. The two facilities took effect from January 2.

The scheme provided some importers extra days to make payments on imported goods due to an economic crisis in the country, but it has turned out to be ineffective, leading to a rise in the demand for informal hawala transactions among many manufacturers, commercial importers, and small and medium-sized companies.

Fahad Rauf, head of research at Ismail Iqbal Securities, agrees that the scheme has proved to be counterproductive. “There is a need to minimise hawala business as it is creating a distortion in the currency markets and putting pressure on the rupee,” Rauf said.

On one hand, the government was trying to preserve the foreign exchange reserves, while also trying to avoid large-scale shortages through such schemes, he said. “The solution to the problems is only one i.e. IMF and not just this programme but another programme after it ends and even with IMF things are going to be tough for common people,” Rauf added.

Pakistan’s foreign exchange reserves held by the central bank stand at $4.2 billion—enough to cover around one month of imports.

Given the volatility of the PKR and the country's ongoing economic and political unrest, it is practically difficult for any reliable supplier to grant a 365-day payment deferral to a Pakistani importer. In order to establish a 365-day deferred payment bank contract with their importing company in Pakistan, commercial importers and manufacturers in Pakistan are making arrangements in Dubai, either by establishing their own company there or by using a third party.

And the method of operation is for the Pakistani importer to use the Hawala channel to make a full payment to the initial foreign supplier. However, Dubai's self-owned or third-party dummy exporter handles the import paperwork.

"It is true that the increased demand for the hawala/hundi somehow is a result of the deferred financing for imports. Both the rupee and the remittances have suffered as a result. Despite the rupee's decline against the dollar, remittances are falling,” said Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan.

Due to the scheme, it is difficult to determine the precise level of hawala demand. But the monthly cost would be in the hundreds of millions of dollars. However, the exchange companies' business is declining, according to Paracha.

The black market rate of the rupee on Thursday was 295 to the dollar. In the interbank market, the rupee ended the day at 283.66 against the dollar, and in the retail market, it was 287.

The exchange companies had offered the government their willingness to pay for the opening of letters of credit (LCs) for imports as banks have been hesitant to do so, on a shortage of dollars, he said. “The need for dollars on the black market will eventually decrease if the government permits us to do so,” he added.

Last week, the SBP removed the existing cash margin requirement on the import of goods with effect from March 31. Industry officials state that banks continue to obstruct the clearance of documents, even for the importation of necessities like oil. Even after the opening of LCs, banks have declined to makepayments. Hundreds of containers are still stranded at ports.

At present, only LCs of essential items are being opened mainly. And others, especially luxury items are discouraged as a general rule, according to a banker. Zulfikar Thaver, president of the Union of Small and Medium Enterprises, said Pakistanis over a period of time had concealed their undisclosed and undeclared wealth in US dollars and it also became a parallel currency. Businessmen have a huge amount of cash dollars in their houses or in lockers and are using it for under-invoicing imports and differences are being sent through hawalas. Dubai is the place where most of them have their offices which receive and send dollars worldwide for these merchants. There are no restrictions, according to Thaver.

He believes that the import payments deferment scheme can be a blessing for the SME importers as they need raw materials and packing materials. “Without imports, their units will close down. Imports and exports are like the warp and weft of the economic fabric, and you cannot export without imports. Factories closure means unemployment as workers will be sacked and downsizing of the office staff will begin. Banks recoveries will be affected and it will become a vicious circle,” he said.